With this series, I hope to show you my view of higher education, split into four parts:

1. Costs: How out-of-control costs have fueled the industry’s financial disaster
2. Revenues: How university revenues are becoming more concentrated and why this is dangerous
3. Covid-19: How Covid-19 is affecting the industry and why schools are getting desperate
4. Solutions: What (limited) solutions exist to break out of this crisis

In this final installment of this series, we look to understand what limited solutions exist for universities. In case you missed it, you can find Part 1 here, Part 2 here, and Part 3 here.

A Quick Refresher: The Super TLDR of the Problem

Universities are stuck in a vicious cycle that is deteriorating their financial health. Here’s what’s happening:

In its simplest form, the problem is that costs are being driven upward at a rate that revenues cannot match.

3 Ways to Break the Cycle

While we all hope to have the optimism of Daenerys Targaryen, in reality, the solutions to break the vicious cycle are few and far between. If they were easy, every school would have done them.

Breaking the vicious cycle will require school administrators to 1) confront the bleak path that they are on, 2) challenge the status quo, and 3) think like businesspeople. These are not easy tasks for anyone, let alone for an industry that has had virtually the same business model for a hundred years.  

Below, I’ll show three ways for universities to break out of the vicious financial cycle in order to lead them on a financially stable path.

Solution #1: Universities must have a firm definition of where they want to compete (and scale back if necessary).

• Theory: Strategy, in business terms, is a series of active decisions of what to do (and what not to do) in order to build a sustainable competitive advantage. Another common definition is a series of active decisions of where to play (e.g., what markets should we be in, what customers should we be targeting) and how to win (e.g., how should I position my products or services to capture those customers).

• Context: As I have argued previously, schools are becoming homogenized as they fall victim to the “Law of More” and overexpand their program offerings. Why has this happened? In short, because universities haven’t made active decisions of where to play, or where they want to compete in the university landscape.
  • Example: A good example of this, according to Bain & Company partner Jeff Denneen in discussions with him, is Princeton University. Princeton clearly defines where they want to play (and more importantly where they do not want to play) by not offering professional schools in business, medicine, or law. Part of this calculation may be that Princeton is within 250 miles of 2 of the top 3 business schools (Wharton and Harvard) and law schools (Yale and Harvard) in the country.
    • What they do right: Instead, the Princeton administration invests their time, energy, and dollars in areas they can win, such as economics and sciences. Are some students turned away from Princeton because it doesn’t offer professional schools? Probably so, but the administration doesn’t care. They made a firm decision of where they don’t want to play and they target students that want a world-class education in one of their other top programs. This reminds me of a quote from Chris Zook and James Allen in Profit from the Core: “From focus comes growth; by narrowing scope one creates expansion.” This is the type of thinking that helped Princeton achieve a #1 ranking on US World News and Report.

• Step 1: Universities must assess the current state of their programs.
  • Main point: The first step is for universities to honestly understand their current strengths / weaknesses, differentiating factors, and competitive advantages. The following questions can help universities understand their current state:
    • What are your highly ranked programs? What are your poorly ranked programs?
    • What majors / departments / degrees are students enrolled in? What is the distribution of students across programs?
    • What is the retention rate in each of your programs / departments?
    • What reasons are bringing students (especially high paying international students) to your school?
    • How much are you spending on each program / department?
    • What programs are you currently focusing your time and energy on?

• Step 2: Universities must define where they want to compete in the future.
  • Main point: Next, administrations must decide what they want the future state of their university to look like. This step involves not only looking at the current state, but also researching trends in demographics, program profitability, and COVID-19 and benchmarking against other successful universities. With this research, universities must make a decision on which programs they should offer in order to be successful for the next 10-20 years.
  • Example: I did a project on Concordia University Texas (based in my hometown of Austin, TX) in college. Looking through its 2017 graduation data (all public on IPEDS here), I found that Concordia had 2 majors that graduated 0 students, 7 majors that graduated fewer than 10 students, and 10 majors that graduated fewer than 20 students. To me, this is clearly a university that has a poor definition of where it wants to compete. Concordia University Texas seems like a university ripe for a clear business strategy and for scaling back departmental offerings.

• Step 3: Universities must invest in the areas that they want to be strong in and cut back on programs that they don’t.
  • Main point: The final step in this process involves schools investing in their strengths (or what they want to be their strengths), something that I am a big fan of in general. Again, I’m reminded of a quote from Zook & Allen: “the better performing of your business units are likely to be those operating the furthest below their full potential.”
    
  • Side note: If schools keep the mindset of fixing their weak programs, they will lose ground in their top programs and transform their weak programs into mediocre ones. Counter to what you may think, business strategy suggests that universities should invest more in their strong programs and cut their weak programs.
    
  • Step 3b: Finally, this process involves scaling back or cutting laggard programs that don’t mesh with the school’s newly defined strategy. Once again, this isn’t an easy process. While directing energy and dollars to the right areas is a strong first step, a necessary second step is to divert funds from, scale back, or cut programs that aren’t a part of the school’s core strategy.

Solution #2: Universities must stop the incessant increase in spending on student services

• Context: At its core, the vicious cycle is due to significant cost increases at universities. Administrations are understandably worried of decreasing enrollment, but they choose to combat this problem by investing in unsustainable non-core services, rather than sustainable core academic areas.

• The solution: Schools must try to limit their investments in non-core areas. By being much more cognizant and frugal with their money going towards support services and building renovations, schools can 1) face less pressure to raise tuition, 2) build a stronger financial state, and 3) stop the vicious cycle right at the source.
  • And what should they do with this money? Use it to invest in the core academic areas that actually increase the value of a degree, areas that will keep sustainably bringing students back to universities.

Solution #3: Universities must begin to merge online & in-person models of education in order to expand their student base without raising costs.

• Context: Previously, we learned that the university fixed-cost intensive business model is tricky because universities can’t easily scale up their student bases as needed. Since most schools are constrained by the size of their classrooms, they can’t easily add more students (and gain revenue) without significant capital expenditures.

• Solution: Schools must try to create classrooms with that merge in-person and online classroom formats if they want to succeed in the post-COVID world. While COVID has pulled forward the adoption of online education, schools must find still find a way to integrate online education once students come back to campus post-COVID.

• Why this is helpful: Universities have a significant amount of their money and assets invested in professors. Like most fixed-cost intensive businesses, a big success factor for universities is fully utilizing their assets. If universities could figure out a way to add online students to classrooms without increasing the cost of professors (thus increasing the utilization of their professors), they could grow their revenue base without significantly increasing their costs. This is a massive opportunity for universities if they could logistically figure out how to add online students without incurring heavy additional expenses.

• Why this is hard: While I am hopeful of solutions like this becoming normalized post-COVID, there are two main reasons why this is tricky to implement.
  1. Technology logistics: The main limiting factor holding back the merging of online and in-person models of education is the technology needed to implement this type of classroom. The big question for administrations is “how can we create a classroom that delivers high-quality experiences for in-person students and students watching virtually? While this year has drastically increased the adoption of these technologies (as schools have literally needed it), I wonder whether schools will continue to use / adopt this technology after the pandemic.
     
  2. Conflicts with alumni: According to Scott Galloway in this podcast, a big factor holding back schools from adding more students is actually conflicts with their alumni. Alumni may view adding more students (and thus increasing enrollment rates) as the school sacrificing prestige for money. While the financial upside to a merged classroom is real, any potential conflicts with a huge donor base may be enough to stop universities from going forward with this model.

Parting Thoughts

Higher education is at a crossroads. A return to healthy financials will require university administrators to 1) recognize that the current business model is broken, 2) develop a business mindset, and 3) make the tough decisions. However, I’m hopeful that COVID will push universities to make these necessary changes.

With that, I leave you with my 4-part perspective on higher education.

What do you think? How can we change higher education for the better?