Bullish on Private Colleges
On the enduring strengths of institutions of higher education
In our July-August issue, Cizik professor of business administration Clayton M. Christensen and his former student, Michael B. Horn, of the Innosight Institute, made the case that the intersection of disruptive technologies with outmoded or failed business models put much of American higher education at risk (“Colleges in Crisis,” page 40). That article prompted extended comment from readers, some of it published in the letters section of the September-October and current issues. Two eminent scholars of higher education now offer their own perspective on what they see as the unique, durable, and adaptable characteristics of private American institutions of higher education—a case they make in part by putting forth an educator’s take on business enterprises. Although the essays were conceived separately, both bear on issues of particular pertinence during Harvard University’s 375th anniversary year, and so we continue the discussion by publishing their argument here. ~The Editors
Most adult Americans can probably recite the case against private colleges and universities at least as readily as the Pledge of Allegiance. The bill of particulars includes unchecked prices, chronic inefficiencies, uneven outcomes, lifetime tenure, arcane research, scattered authority, and aversion to change. Outsiders are baffled by the constraints on the institutions’ leaders, the glacial rate of change, and the tortuous process for reaching decisions. The indictment also depicts the nation’s 1, 550 or so private nonprofit colleges as unresponsive to the innovations of for-profit vendors and online education. Thus, a chorus of critics has concluded that private colleges and universities have a fundamentally broken business model sustainable only by the most elite institutions. As for the rest, the bears advise, short the sector.
We are contrarians, bullish on private colleges despite their many difficult challenges and widespread public discontent (57 percent of Americans do not view a college education as a good value for the price). We offer no brief for complacency; changes must occur. Private colleges do not, however, face an existential threat. Rather, alarmists repeatedly misperceive the sector’s prospects through the familiar, but distortional, lens of business. For many decades, management experts have contended that colleges must behave like businesses in order to prosper. While this message has not changed, the cure-alls have. The steady stream of surefire “solutions” has included zero-based budgeting, management by objectives, total quality management, continuous quality improvement, business-process reengineering, strategic planning, benchmarking, and innovative business models. All rest on the premise that a single concept can be fruitfully applied across all industries and professions without “tissue rejection.”
We are skeptical of meta-theories and partial to a principle of biodiversity: different organisms (and organizations) thrive or perish under different conditions. Short-sellers incline toward inapt prescriptions for private colleges, such as radical mission makeovers, wholesale shifts to online delivery systems, and fealty to profit-oriented business models. We believe these tactics would be as ill-advised for private colleges as adherence to academic norms would be for publicly traded corporations. To survive, let alone succeed, for-profit companies cannot play by the same rules as private colleges, and vice versa. And even though the norms of independent colleges seem odd and irksome to many, “unusual” does not mean “unsuccessful.” In fact, independent colleges are remarkably durable, stable, and adaptable. Why is that so despite the sector’s coolness to the “best practices” of business?
Corporations operate in merciless markets. Fatalities include American Motors, Bethlehem Steel, Borders, Montgomery-Ward, PanAm, Polaroid, Pullman, RCA, and Woolworth’s, to name only a few. Of the 12 original components of the Dow Jones Industrial Average (established in 1896), only General Electric remains. Only 62 companies have made the Fortune 500 every year since the list was introduced in 1955. Nearly 2,000 others have appeared and disappeared due to acquisition, decline, or bankruptcy. Between 1999 and 2009, the number of NYSE-listed companies dropped from 3,025 to 2,327; on NASDAQ, the numbers plummeted from 5,556 in 1996 to 2,852 in 2009. Some of the most highly touted companies have stumbled or crumbled. In Search of Excellence (1982), a one-time Bible for business, cited Amdahl, Data General, Digital Equipment, K-Mart, and Wang Labs among 43 companies that “pass all hurdles for excellence.” Likewise, Good to Great (2001) listed Circuit City and Fannie Mae among 11 “great companies.”
By contrast, the only notable private college to close in recent memory, Antioch, will soon reopen. Indeed, an extrapolation from federal data suggests that less than 0.5 percent of all colleges and universities have closed since the early 1980s. As ranked by U.S. News & World Report, the top 25 private liberal-arts colleges were founded, on average, 179 years ago; the top 25 private universities, 185 years ago. Even more impressive, the top 35 private regional colleges in the Midwest—small, uncelebrated schools particularly vulnerable to competition from strong state universities and dismal demographics—have endured 123 years on average. The last year-over-year enrollment decline at private colleges was in 1985.
In the corporate sector, frontrunners routinely, sometimes suddenly, become also-rans. Just look at excerpts from the Fortune 500 in 1955 and 2010.
Newcomers such as Pandora, LinkedIn, and Google zoom from ideas to IPOs. In other cases, upstarts bypass leaders. Southwest Airlines surpassed legacy carriers; Netflix demolished Blockbuster; Wal-Mart and Costco prevailed as A&P and Grand Union all but disappeared. Companies operate by the code of the German Autobahn: if you cannot keep pace, get the hell out of the way.
The market dynamics for colleges and universities are quite different. By and large, the caravan stays in line. One school may occasionally edge ahead of another, but the convoy basically remains intact. Compare a reputational study of American universities in 1906 with the 2011 U.S. News rankings.
Only one private university, Cornell (an institution with public components), dropped from the top 13. Among the U.S. News Top 10 Liberal Arts Colleges, there has been one change between 1991 and 2011: Haverford replaced Wesleyan. The other schools, slightly reordered, have remained the same. Fewer than 50 colleges have been in the top 40 since 1996. From top to bottom among private colleges, stability prevails. Overnight successes do not occur. The youngest top-tier university, Caltech, was established in 1891. Since older generally means better in this context, admissions brochures do not trumpet the all-new 2012 Princeton baccalaureate or Bowdoin 5.0.
Although rapid transformations are scarce, private colleges are not static. Substantial reforms do occur, usually organically and gradually, sometimes imperceptibly, as snapshots over the past several decades reveal.
• Programs. Of the 637 purported liberal-arts colleges in 1994, the majority did not meet the minimal threshold of 40 percent of degrees awarded in the liberal arts. The rest were nominally small professional colleges. The number of pure liberal-arts colleges was 212 in 1990 and 137 in 2009. In effect, some 500 institutions, responsive to market demand, evolved into comprehensive colleges or master’s universities with an emphasis on professional programs like business and health that satisfy the instrumental aims of today’s students.
• Faculty. In an effort to control costs, private colleges markedly reconfigured the professoriate. Between 1999 and 2009, less expensive nontenure-track, full-time faculty at private colleges increased by 46 percent and part-time faculty by 36 percent, compared to 16 percent for tenure-track and 13 percent for tenured. In that same decade, the proportion of full-time faculty at private colleges dropped from 73 percent to 67 percent.
• Globalization. Private colleges and universities have embraced global markets. Four private institutions rank among the top 10 universities to enroll international students. Dozens of private universities have campuses or programs abroad. Ten percent of Grinnell’s applicants are foreigners. Since 2006, Barnard’s international applications are up over 500 percent, Franklin and Marshall’s almost 250 percent.
• Tuition. Published tuition at private four-year colleges, the most maligned and misconstrued metric, escalated 50 percent, inflation adjusted, between 1990 and 2008. (By comparison, Standard & Poor’s reported that corporate executives enjoyed a 300 percent pay increase between 1992 and 2010, and a Duke economist calculated that salaries of football coaches at 44 public and private universities increased 650 percent in constant dollars during the past 24 years, while presidential salaries climbed 90 percent.) However, the average institutional discount rate (the average institutional aid per student divided by published tuition and required fees) climbed from 27 percent to 42 percent during the past two decades. In constant 2010 dollars, the College Board determined, net tuition rose only 10 percent from $10,310 in 1995-96 to $11,320 in 2010-11, a slower rate of acceleration than the added costs colleges and universities incurred as measured by the Higher Education Price Index. Inflation-adjusted, net tuition at private colleges actually declined in 2010-2011. Meanwhile, the payoff in lifetime earnings on a baccalaureate degree (both public and private) versus a high-school diploma has multiplied from a 40 percent advantage in 1980 to 83 percent in 2010.
In the rearview mirror, we can see that private colleges and universities have also adapted to new demographics, adjusted (for better or worse) to students as consumers with unlimited appetites for amenities, and acclimated to the explosion and commercialization of science and technology. In 2011, four of the top six, and six of the top 10, leaders in licensing income were private universities.
Short-sellers discount these and similar initiatives as stopgap measures—levees that provided protection under normal conditions but are now doomed to collapse under the force of for-profit universities and online education. Let’s take a closer look at these “disruptive innovations.”
Money poured into publicly traded for-profit universities as enrollments soared—none more so than the University of Phoenix, where by 2009 the numbers reached 438,000 students online or in class. Between 2000 and 2005, Apollo, the parent company of the University of Phoenix, was the second-best performer on NASDAQ with a market capitalization of $13.57 billion (and a price-earnings ratio of 60), greater at the time than American Airlines, Eastman Kodak, and Saks combined. The business model emphasized standardized curricula, work-related degree programs, consumer convenience, part-time faculty, and online delivery, and minimized physical plant, faculty research, and shared governance. For-profit players like Apollo, Strayer, DeVry, and Kaplan were heralded as game-changers. Bloomberg News called Phoenix’s online program “The single greatest improvement in higher education since the condom.” [Editor's note: Matthew Winkler, Chief, Bloomberg News, has called our attention to the fact that the quote comes from a signed commentary by columnist Christopher Byron, and was published with the disclaimer that "The opinions expressed are his own," not a conclusion of Bloomberg News. That organization's reporters were Pulitzer Prize finalists for their 2010 investigation of for-profit colleges' finances. January 4, 2012.] Private colleges and universities fretted about powerful new competitors. Who knew that bubbles burst in higher education, too?
With a 7 percent decline in overall enrollment since 2009, a 42 percent drop in new enrollments between March 2010 and March 2011, a 9 percent six-year graduation rate (versus 65 percent for private colleges and 22 percent for all for-profits), a dependence on Pell grants and federal loans for nearly 90 percent of total revenue, excessive defaults on student loans, and intensified regulatory reviews, Phoenix wilted. Since March 2009, Apollo has ranked as the third-worst performer of publicly traded companies and the third worst among the S&P 500 in 2010. Apollo’s market cap nosedived 57 percent to $5.8 billion in 2011. In March 2011, Apollo reported a quarterly loss of $64 million and the stock price plummeted from a high of $90 in January 2009 to a low of $33.75 in November 2010. It currently trades in the mid 40s. Capital markets are no longer bullish on for-profit universities. Under the headline “Apollo Sent to Back of Class,” Barron’s declared in March 2011 that “shares are rightly getting a failing grade….We would steer clear of the uncertainty surrounding Apollo and its industry….”
Meanwhile, traditional colleges and universities have hardly ceded the online market to for-profits. The Sloan Consortium, which produces a definitive annual update on online education, reported that 18 percent of students at private colleges and universities had taken least one course online in 2008. Scores of nonprofit hybrids—for example, Tiffin (in Ohio), Ottawa (in Kansas), and the University of Southern New Hampshire—offer on-campus programs for 18- to 22-year-olds as well as online degrees targeted to older students. At some of these schools, enrollments have expanded exponentially: more than 100 percent over five years in some cases. Western Governors University, a purely online nonprofit, serves 25,000 students. Success stories like these leave the bears confident, indeed certain, that online programs will inevitably capture the majority of traditional college-aged students.
We remain unconvinced that sizable numbers of 18- to 22-year-old collegians will opt exclusively or predominantly to be homeschooled via technology (a prospect many parents might not relish, either). Online growth rates have already started to decelerate. Between 2002 and 2009 the proportion of all students (public, private, for-profit) taking at least one course online increased from 9.6 percent to 29.3 percent, a compound annual increase of 19 percent. However, the upsurge was confined mostly to about one-third of all postsecondary institutions that together enroll 43 percent of all students but nearly 66 percent of all students online. Since 2006, the growth rate at these “leading online institutions” has slowed to 13 percent, which “may be the first indication,” the Sloan Consortium observed, “of the end of the continued rapid expansion in online enrollments.”
Questions about quality persist. For instance, a 2010 National Bureau of Economic Research study concluded, on the basis of a controlled experiment to compare online and face-to-face enrollment in a microeconomics course, that “much more experimentation is necessary before one can credibly declare that online education is peer to traditional live classroom instruction, let alone superior….” In a recent Sloan survey of chief academic officers, 34 percent judged online education to be inferior to face-to-face instruction; 17 percent registered the opposite view.
We see no chance that for-profit universities and online education will render private colleges twenty-first-century versions of abandoned factories. On the other hand, there are significant risks at hand or on the horizon. These include:
• Expanded authority for two-year colleges to offer four-year degrees, already an option for select degree programs in 17 states.
• Greater resource disparities between four-year colleges and research universities as the latter successfully monetize their intellectual capital through licensing arrangements and equity positions in startups.
• The possibility that federal and state student financial aid will become performance-based—payable upon commencement, not enrollment.
• The prospect that the wealthiest colleges and universities will virtually eliminate undergraduate tuition.
In the face of these challenges, how colleges proceed will materially affect the degree of success each attains. To understand this dynamic better, let’s take a quick trip abroad.
Every year, millions of Americans visit countries like England, India, and Japan, where traffic circulates on the left side of the road. We feel disoriented; habits we have found useful turn dangerous; and experience becomes an unreliable teacher. We might be perplexed, but the two billion residents of these countries who drive on the left motor along as effortlessly and as safely as we do at home. Instinctively, we perceive these drivers to be on the wrong side of the road but, in truth, we know that they simply drive on the other side.
Similarly, people from the for-profit sector wonder why private colleges and universities do not conform to the best practices of business: innovative, bold leadership; distinctive, proprietary strategic plans; rigorous quantitative-performance metrics; and cold-blooded divestiture of unprofitable product lines. Why not pursue heftier margins and greater market share? Why not, literally and figuratively, drive on the “right” side?
To people unaccustomed to academe, the scene on campus resembles bumper cars at an amusement park more than automobiles on an expressway. Leaders do not direct traffic as much as orchestrate the intentions of drivers. Strategic plans are always public and often contested. Competitors routinely collaborate. Prestige, the academy’s analog to profits, stems from exclusion, not expansion—from the percentage of customers refused, not the number served. Welcome to Wonderland.
With few exceptions, change happens differently in this realm. The business mindset conditions outsiders to expect powerful CEOs, comprehensive strategies, precise directives, systematic execution, and rapid response. Instead, artful leadership on campus unfolds tentatively, ambiguously, gradually, and somewhat obscurely. To the untrained eye, no one seems to be in charge. Yet, more often than not, the bees actually build the hive: the percentage of tenured faculty ebbs; the number of preprofessional programs rises; online courses appear; new disciplines emerge; scientists embrace entrepreneurship; schools burnish brands—all without presidential pronouncements.
As researchers and consultants on leadership and governance, we appreciate that college presidents are critically important agents of change. Contrary to expectation, perhaps, the most successful hew to the conventions of the campus, not the buzzwords of business playbooks. Influence accrues as a president demonstrates congruence with organizational culture, reinforces core values, and relies on familiar processes to introduce initiatives. However unglamorous a strategy, subtle adjustments and sensible experiments at a steady pace, consistent with an institution’s self-identity, have and will position private colleges to do well over the long run.
The bears see death at the doorstep of traditional colleges and urge drastic action. Not coincidentally, the prophets of a large-scale crisis are also the purveyors of a sure-fire solution: a new business model. We question the long-term wisdom of a massive bet hastily placed on the educational and commercial potential of online education. More important, we doubt the compatibility of for-profit business models and “for-purpose” private colleges. Surely, no one would suggest that businesses challenged by new competitors and economic adversities embrace the model of academe. Why the converse, especially when private colleges have been so resilient?
We offer a simpler suggestion: learn to drive like the natives, as bizarre as the rules of the road may seem at first. Solutions that presume or impose a shift to the “right” side of the road will produce far more crashes than successes.
Between the island of Macau and mainland China, the Lotus Bridge achieves a miraculous conversion: through a looping figure-eight, six lanes of traffic shift from driving on the right in China to driving on the left in Macau. No Lotus Bridge connects the provinces of colleges and corporations. Instead, we have to adjust and abide by different rules of the road. Private colleges will evolve and endure as long as they do not try to become what they are not: businesses.