Traditional Higher Education – A Fractured Business Model

This is the first in a series of weekly blogs from Right Advisory LLC based on knowledge gained and opinions formed during a multi-year engagement as a contract CFO/CAO of a major international university. The challenges to balance budgets, delight students, encourage faculty, satisfy supporters and meet societal objectives were top-of-mind and constant subjects of discussion. Although similar discussions around similar subjects occur in the commercial world, the systems to make decisions and take action are much more advanced. This blog will address the gap that exists and ways it might be closed.

***********************

There is much criticism being written about higher ed – poor outcomes, high admin costs, high student debt, low graduation rates, etc. The value proposition seems ill defined and could indeed vary by customer and employee. I intentionally use these commercial terms to illustrate the similarities between running a successful business and a successful university.

First, lets look at the higher ed industry – it is no doubt under significant resource pressure and technological change. Gone are the days of simply raising prices to cover rising costs. Bricks and mortar settings and teaching silos are being replaced with online courses and collaborative learning structures. It is an industry under aggressive renewal. It is an industry ripe for consolidation. Commercial industries similarly situated include healthcare, banking and most professional services.

Now lets look at the traditional business model – as a professional services business, the higher ed design is inverted verses the commercial model. There are far too many executives (tenured faculty – the rainmakers) compared with workers (support faculty – the troops). This is an inherently “low leverage” model. A commercial business would be closer to 10 troops for 1 rainmaker. Consequently, the model has little ability to promote productivity causing inflation to have to be transferred to customers. Commercial businesses would churn the troops to balance career aspirations with cost control. This is the reason for stress in the model when pricing becomes inelastic – as it has been since at least 2008.

Next, financial management – too few universities have embraced modern systems of accountability and transparency. Long-employed accounting structures in commercial businesses such as centralization, standardization, automation and integration are often counter-cultural in universities – and the opportunity cost can be substantial. But more importantly the transparency, controls and timeliness achieved through modern financial management systems can significantly improve decision-making.

Finally, governance – many universities are dependent on taxpayers for support. That source of cash has been and will continue to be stressed. In exchange for money, the state (or other political entity) requires universities to be governed by political appointees. Even the boards of private universities tend to be political and larger in number than most any business enterprise. Couple the complex board structures with shared governance provisions, and you have system that makes for very slow decision-making and often dysfunction. The competitive environment will not wait for boards to reach consensus – especially when consensus means unanimous. A much more nimble governance structure (public corporations do it with an average of nine directors) will have to evolve for traditional institutions to have any chance at sustainability.

We will embellish on these themes in future blog posts. Comments welcomed.

Robert M. Tarola, CPA, CGMA
President
Right Advisory LLC
http://www.rightadvisory.com

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s