Has for-profit higher education missed its big opening into the mainstream?
The news has been filled recently with two “orthogonal” continuing stories about higher education. The first story involves a seemingly never-ending list of egregious activities that touches almost all of the well known (and less well known) names of for-profit higher education, and the congressional indignation that has followed. It seems increasingly likely that the congress will enact laws that will restrict significantly the conditions under which the for-profit higher ed world can access government student financial aid. Should this happen, it could greatly constrain the growth of the for-profit sector, and, in fact, put the survival of some of its players at risk. The second story involves the increasingly aggressive growth of on-line degree programs of traditional, bricks and mortar non-profit universities and colleges. This aggressive growth has been driven by an increasing understanding that current funding models of the non-profit sector are broken, and it is imperative to find new revenue streams. Perhaps the most visible, and potentially game changing, of these on-line efforts was recently announced by the University of California system. One can imagine a situation in which the very highly respected UC system offers a broad spectrum of effective, high quality on-line degrees at prices competitive with those of the better for-profit institutions. Brand sells, and UC has a much better brand than any of the for-profits are likely to have in the foreseeable future. Under these circumstances, what space would be left for the for-profits laboring under a host of congressionally mandated constraints?
The realization that US post-secondary education attainment is dropping below that of many of our global competitors, and the increasing constraints on capacity defined by shortfalls in the current funding models of higher ed have pointed to need for significantly increased post-secondary capacity (The coming shortfall in workers with postsecondary credentials). A year ago, many would have suggested that only the for-profits could provide that needed capacity, providing a perfect opportunity for the for-profits to move into the mainstream of higher education. Have the for-profits missed this golden opportunity because of a perfect storm driven by greed of some members of their community on the one hand, and the changing economic conditions for nonprofit higher education on the other?
There obviously is not a clear answer to this question at this point. However, it is interesting to consider some important points regarding both the for-profit and non-profit sides of the question.
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The negatives of the for-profit side are on much display at present. There seems to have been a widespread lack of understanding in the sector that higher education plays a central role in the American dream that puts in on a different level from, say, auto repair or mortgage lending. Because of this special role, unethical (not to mention illegal) behavior in the provision of higher education will likely be met with societal responses that are considerably harsher than would be stimulated by similar failures in other sectors. Perhaps because of this lack of understanding, the sector did not sufficiently police itself against providers who focused on the quick buck, and many of the more responsible players did not set up sufficient internal controls to catch bad behavior on the part of employees. Business models that focused almost exclusively on gaming the federal student aid budget through recruitment of large numbers of aid-eligible students with little or no potential to graduate put the sector in a very risky position, indeed. Thus, we see recruiting scandals, loan repayment scandals,etc. As a consequence, it would not be at all surprising to see a number of laws and rules coming out that greatly restrict conditions under which students in the for-profit sector have access to federal loans, and much tighter rules on student recruiting.
However, there also is much to be positive about on the for-profit side. Much of the real innovation in higher education over the past decade has come from this sector. Most have focused on matching educational opportunities to the realities of the life conditions of adult students, e.g. courses that start on an almost continuous basis rather than two or three times a year, learning centers located in high traffic areas for better access, broad on-line offerings, standardization of course content between campuses to enable continuity when students move, and an emphasis on career preparation. They are flexible, able to expand or contract following demand, and rapidly create new courses of study in response to local employment opportunities and in consultation with local business leaders. Some have evolved systems of advising and tracking of students that provide considerably more contact and support than has been traditional in higher education.
The sector has controlled costs while the rest of higher education has given at best lip service to the issue. Cost control has been at administrative, facilities, and instructional levels. In the last of these, new instructional approaches have been developed. Many of these institutions build new courses by involving subject matter specialists, learning specialists, and media experts in a real partnership of equals to create an approach that encourages learning – a costly approach compared to that followed in the non-profit world where the faculty member is expected to play all three roles while being trained only in the subject matter role. This approach, however, enables a variety of options in presentation that can greatly decrease overall costs.
The for-profit-sector has not made the mistake of equating program quality either with the level of prior educational attainment of entering students, or the fraction of applicants who are rejected. This, coupled with the innovations such as those mentioned above, has led to this increasingly becoming the sector of choice for working adults returning to education, and of underrepresented minorities. Increases in both of these areas obviously fit perfectly with national priorities.
Even among the real and obvious negatives mentioned above, some balance is called for. In 2007, there was a major scandal in the non-profit sector relating to students being directed by their financial aid offices towards loan companies that had financial relationships with the directors of those offices. Financial aid directors at a number of prestigious universities were dismissed as a consequence. Thus, greed is not an attribute limited to the for-profit sector, but rather something that must be controlled everywhere.
A very large fraction of students at the for-profits do have Pell grants – but this also indicates that the sector is providing opportunity to students who are less well off financially. Many of the less well-known members of the non-profit sector also have high participation in the Pell program. Both reflect the well known statistic that parental income correlates well with admission into higher ranked institutions. Indeed, in the loan data that has been disclosed, one sees that a number of less prestigious non-profit institutions have repayment numbers similar to those of the for-profits, as well as similar graduation rates.(see, e.g. MagicDiligence’s analysis of two athletic conferences) It has also been noted that the historically black colleges have a mean repayment rate that puts them well below the mean for for-profits; another set of institutions with repayment rates below that of the for-profits consists of medical schools such as Harvard, Tulane, and Chicago!
If one looks at the loan data more globally, what one sees is a problem for all of higher education. Debbie Frankle Cochrane, a program director at the Institute for College Access and Success calculated from this data that students from non-profit public institutions are repaying loans at 54%, non-profit privates at 56%, and for-profits at 36%. Thus, in the best case, close to half of the graduates with loans are not paying them off according to the criteria used by the government! This raises real questions about the cost of higher education and the actual financial return on the education obtained-across all sectors, both for- and non-profit. When and if the government moves forward with criteria regarding “gainful employment”, in all honesty, it is an issue for both for- and non-profit sectors.
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Clayton Christensen’s classic management work The Innovators Dilemma describes what happens to industry leaders when an upstart brings a disruptive innovation into an industry. I have commented before that online learning may well be a disruptive innovation, and the business model of the for-profit education companies (especially when connected with online learning ) similarly may be a disruptive innovation. Christensen’s work shows that it is almost impossible for industry leaders to successfully adopt a disruptive innovation. Primary reasons for this failure include 1) a corporate mind set that refuses to acknowledge that the new approach brings a quality proposition that the customers will find more valuable than the traditional approach; 2) an infrastructure built to support the more expensive traditional approach prevents the new approach from being used in a cost- effective, competitive way; and 3) the new approach provides direct competition to the old product, and thus poaches customers away from the old product. The few companies that have been successful in incorporating a disruptive innovation have done so by setting up independent divisions far from corporate headquarters, carrying little of the traditional corporate overhead costs, and with carte blanche to destroy the viability of the traditional product line – Schumpeter’s Creative Destruction within the corporation itself.
The question of whether or not the traditional non-profit world of higher education ultimately can compete with the new world being defined by the for-profits is a serious one. All of the red flags raised by Christensen are present: 1)The faculty – who make up the academic management of traditional higher ed – are broadly and actively hostile to the for-profits and their approach. They generally are convinced that the education being offered is second class and the approach is simply wrong. Crafting courses in response to input from businesses is often viewed a violation of academic freedom. As a consequence they resist attempts by their institutions to consider the innovations emerging from the for-profit sector. 2)Where such innovations as online learning are implemented, they are simply grafted onto existing structures and approaches. This leads to the oft heard- and completely incorrect- statement that creating and teaching an online class is more expensive than a traditional classroom one. It only seems more expensive because we accept as our baseline the very expensive infrastructure underlying the traditional classroom course, e.g. physical classrooms built at high cost to signal the serious academic standing of the institution; expensive facilities poorly utilized because of a rigid academic calendar; and costly research faculty who teach only a few courses per year to a relatively small number of students. If we accept this baseline as necessary, then the marginal cost of producing another traditional course is certainly less than the marginal cost of producing an effective online class. However, to bring the disruption into the university, we must recognize that none of these costs and restrictions need apply to the new product if we start with a fresh approach. 3)There is an oft-articulated fear that “online education will draw students away from our traditional courses”. One response has been to price online courses higher than the traditional ones, which is hardly the way to create the market share necessary to compete with the innovators.
Another big issue for traditional higher education as it considers this new world will be “brand”, or perhaps “mission”. Mission originally involved teaching students from a certain geographic area. The geographic region of draw has broadened greatly for most institutions, but mission still relates primarily to students willing to come to the central campus. Numerically, the overwhelming focus of current mission in this sector is undergraduates, with most outside of the community college area focusing on “traditional” 18-24 year-old full-time undergraduates. Brand has been significantly based on exclusiveness, or the number of applicants that can be rejected as not being up to academic snuff. Although professional training is now an accepted (by most, but not all faculty) part of college and university life, the major universities have a relatively limited list of professions that they consider worthy of serious study. The for-profits reject geographic mission boundaries, see little value in exclusiveness, focus on non-traditional students of all ages, and consider job-related training at all levels to be meritorious. Thus as traditional higher education institutions move into the for-profit space in search of increased revenues, they will have to seriously consider how they will change some of the traditional components of their brand and mission. Such considerations are likely to be quite contentious (see Christensen’s first point above), and no major traditional institution has yet seriously undertaken this critical step.
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There is little doubt that the regulation that likely will be forthcoming from congress and the executive branch will hit many in the for-profit world quite hard. In the end, the survivors are likely to become more formidable competitors because they will much more alert to the business necessity of more closely adhering to the ethical and social norms that society expects to see in higher education. Phoenix, Walden, Kaplan, Capella and others are already developing offerings at both undergraduate and graduate levels that look very similar to what one might see in a major university. Unnoticed by many in the non-profit sector, they are all moving along the path of improving quality that is hallmark of destructive innovators. Their growth prospects and brands will obviously be harmed by the current mess, but their intention clearly is to fill the space that UC and other traditional universities are thinking of moving into in order to stabilize their revenue models. Many of the traditional universities clearly have much stronger brands at this point, but are they willing to make the changes necessary to achieve the kinds of market penetration necessary to balance their budgets? Only time will tell, but I would guess that most of the first tier non-profits will have a very difficult time in moving significantly into this space. The exceptions are likely to be those, such as NYU, that already have highly robust continuing education degree programs and thus have already begun to cope with some of the issues described above. I would expect that several of the second tier non-profit colleges will be more successful in moving into this space – they have more to gain by change, and they have significant positive brand recognition that will help differentiate them from their for-profit competitors.
Interesting times!
August 25, 2010 in Competition, Current Affairs, For-profit higher education, Mission, Price and Cost
From August 2010