The Higher Ed Industry – Ripe for Consolidation

As noted in our initial blog post, the higher ed industry is under severe scrutiny from legislators, regulators, payers, and users. Everyone is asking about the value proposition. Unfortunately, there are no “generally accepted” standards for assessing value. In fact, list price has become a proxy for value – even though very few students actually pay list price. And the ability to collect list price becomes more doubtful as each year passes. At the same time, costs keep rising – a factor of general inflation and an upside-down business model. We will address the business model issues in a later blog. For now let’s look at the economic factors of supply and demand.

It is fair to say that there is stress in the 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.

The question is whether the traditional institutions will find a way to consolidate and share resources to compete with the emerging educational models, or struggle at going-it-alone until they have no choice. As largely a tax-exempt industry, the traditional institutions already receive high indirect taxpayer subsidies – and most receive direct subsidies as well. Yet many can still not make ends meet. For higher education to be a societal imperative, it must be affordable. The allocation of resources needs to be rethought to achieve a better balance of opportunity and investment. There is far too much supply for the demand, and the traditional model is under direct attack.

The challenge (and impediment) to a more efficient use of resources is the “tradition” in the traditional university. No other industry has “graduates” with so much influence. Graduates tend to think of themselves as continuing owners – partly because of the emotional bond to their alma mater and partly because of the brand value that they ascribe to their life accomplishments. Despite those strong connections, however, only a few elite schools can pay the bills on alumni support and tuition alone. Most will continue to need taxpayer subsidies.

This begs then for industry changes that will allow for a more effective use of taxpayer money for the benefit of society. Some of the changes that should be considered include: combining institutions to achieve educational and administrative synergies; moving investment from hard assets to soft assets rewarding those who innovate; replacing the tenure model with a performance driven reward system; and, allocating taxpayer resources more equitably among students. Why should Mary get $x, while Jane gets $xx, and Jack get $none? By whom and from where are those value judgments being made with taxpayer money?

Senator Tom Harkin (D-Iowa), as Chairman of the Health, Education, Labor and Pensions Committee is launching a review of the higher education industry. Hopefully he will include a value proposition assessment of taxpayer subsidies. It will be enlightening to see how certain institutions defend their use of government money – stay tuned!

In my next blog post we will address the business model and why it is not sustainable.

Robert M. Tarola, CPA, CGMA
Right Advisory LLC





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