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The Highly Endangered Higher Education Business Model (and How to Fix It)


Mark Toner

man with empty pockets


There’s no sugarcoating the ongoing financial challenges institutions face, but strategic leadership can help ensure sustainability.

April may be the cruelest month, as T. S. Eliot famously wrote, but for higher education, it would be tough to beat March 2015.

On March 3, Sweet Briar College in Virginia abruptly announced that the 114-year-old women’s college would shut its doors at the end of the academic year. While the small liberal arts college has an $85 million endowment, officials said it would take more than three times that amount to keep the doors open. Then, a little more than a week later, the Arizona legislature and Governor Doug Ducey moved to pull all state funding from two of Arizona’s largest community college districts—an unprecedented move that zeroes out state-level support to institutions serving more than 330,000 students.

Both are the extreme results of long-standing trends: declining state support for public institutions and concerns about sustainability for private colleges. The resurgent economy and better endowment performance have done little to improve optimism: According to the latest poll of college and university chief financial officers (CFOs) by Inside Higher Ed and Gallup, fewer than a quarter are strongly confident in the sustainability of their business model for the next five years. Even fewer—only 13 percent of the 438 CFOs who responded—are strongly confident in their model over the next 10 years.

“I think the whole of American higher education is on the cusp of a state of flux that we have never seen,” Sweet Briar College President James F. Jones Jr. told the CBS Evening News.

As discouraging as these trends are, colleges and universities of every type and size are meeting the challenges with innovative adaptations and solutions to ensure financial stability for years to come. And while many consider higher education hidebound and resistant to change, American Council on Education (ACE) President Molly Corbett Broad pointed to a key characteristic that augurs well for its long-term sustainability: “While colleges and universities have deep roots that have produced longevity, they are also resilient,” she said. “If you really examine institutions, you find they have changed in many ways during their lifetimes.”

“Trends as reported in the media are often at odds with reality,” said Richard Ekman, president of the Council of Independent Colleges, which represents 600 smaller private institutions. Pointing out that the number of colleges that have closed each year has remained fairly constant over the past three decades, Ekman cautioned against buying into the narrative of inevitable decline that’s become prevalent among policymakers and the public. “Many colleges do successfully counter the trends,” he said.

Beyond the Numbers

The trends are neither encouraging nor news to higher education leaders. In fact, the challenges have unfurled slowly, and seemingly inevitably, over recent years: Tuition increases, growing discounting—estimated as high as 46.4 percent in 2013–14, according to a survey conducted by the National Association of College and University Business Officers—the shrinking pool of high school graduates, mounting student debt, and lower family incomes have all taken their toll on the traditional higher education business model.

By 2013, Moody’s Investors Service was warning that nearly half of the nation’s colleges and universities are no longer generating enough tuition revenue to keep pace with inflation—a fact that is all the more worrisome considering how low the inflation rate has been in recent years. Even fundraising, which grew by 5.2 percent in fiscal 2014 as the economy improved, remains below expectations, according to the annual survey by the Council for Advancement and Support of Education.

Public institutions are facing additional challenges amid the brightening economic picture. While states increased higher education appropriations by more than 5 percent in fiscal 2015, half of all states are earmarking less for higher education than they did five years ago, according to the annual survey from the Center for the Study of Education Policy at Illinois State University and the State Higher Education Executive Officers Association. And while Arizona may be an extreme example, 10 states saw declines in appropriations between fiscal 2014 and 2015, the survey said. In many places, pension and retirement health-care liabilities remain unresolved challenges that threaten to crowd out everything else.

But the news isn’t all bad. The Tennessee Promise, which uses lottery revenues to guarantee free education at the state’s two-year public colleges, has received national attention from President Obama, and similar approaches are being explored elsewhere, including Oregon and Chicago. Even Moody’s, whose sector reports aren’t known for baseless optimism, acknowledges it sees “green shoots,” largely because of the continued demand for degrees, particularly at the associate and master’s levels.

“Demand for higher education is going to continue to grow,” said Broad, pointing to the growing need for lifelong education among today’s workers. “As the characteristics of the higher education learner continue to shift, colleges and universities are going to have to respond.”

Institutions are beginning to pay attention, said policy analyst Jane Wellman, who founded and led the highly regarded Delta Cost Project. “The conversation is becoming more sharply defined, but it’s not there yet,” she said. “I do think there’s a greater consistency in the language and the conversation between business officers and college presidents and board members. There’s a growing awareness that it’s not just a revenue problem, and that solving the gap is going to require tackling cost structures and the decision-making process.”

A Tale of Two Colleges

Much has been written about Sweet Briar’s decision to close. But 60 miles away, another small women’s college is adding new programs, including a college of health sciences that’s “attracting a whole new stream of students,” according to Ekman. Mary Baldwin College (VA) has offered adult education programs for decades—and it is now offering an expedited admissions process for current students at Sweet Briar, who will have to find a new place to continue their studies if the institution does shut down as anticipated.

Ekman pointed to the growth of semiautonomous ventures that have helped sustain traditional residential programs at institutions such as Utica College (NY)—which launched nursing programs not only in nearby Syracuse, but also in Florida—and Southern New Hampshire University, which has become a nationwide leader in online degree programs.

While institutions have also been seeking cost savings for some time, some are now finding creative new ways to do so. Indiana’s Ivy Tech Community College anticipates saving more than $20 million over five years by outsourcing the operations of bookstores across 29 campuses. Since cost-cutting has been a focus for so long, many institutions have already addressed the low-hanging fruit and are now thinking more strategically, experts say.

“The impact of the recession of 2008 sent the message pretty clearly that expedient actions without an overarching strategy are not going to accomplish sustainability for the long haul,” Broad said.

Bold Changes

That was the approach the State University of New York (SUNY) took in 2011, when it launched a shared services initiative, resulting in anticipated cost savings of $100 million across the system’s 64 campuses by the end of June. SUNY has since launched a performance management system, SUNY Excels, that helps make the case for its campuses’ efforts in access, completion, success, inquiry, and engagement.

“By showing our collective impact and progress over time, SUNY will demonstrate to all of its stakeholders that there is great value in their investment,” said Chancellor Nancy L. Zimpher. For SUNY, these efforts have resulted in increased transparency and accountability—and $18 million in new state dollars for a strategic investment fund that will help scale promising initiatives at individual campuses across the system, as part of a larger $42.2 million budget increase.

With an ambitious goal of increasing the number of graduates from 93,000 to 150,000, SUNY’s leadership realized the challenges of “trying to do that on yesterday’s dollars,” said Eileen G. McLoughlin, the system’s chief financial officer, pointing to consensus around the value of efforts to improve completion and student success. “There are successful programs throughout our system, and the funding is going to help us scale that.”

Strategic decisions don’t always involve dramatic shifts. Consider Whitman College, a small liberal arts institution in the state of Washington. Whitman has no plans to add online courses, additional degree programs, or even summer terms. Instead, it is focusing on its small liberal arts program—one of the few in the region—and increasing academic quality in a bid to attract more students, said George Bridges, Whitman’s president.

“We began with the assumption that our greatest asset was quality and we had to invest in it,” Bridges said. To that end, Whitman has launched a $150 million campaign to increase scholarship support for students and created a computer science program with the help of technology companies in Seattle, and is building a pool of internship experiences. It has also dramatically increased its proportion of tenure track positions.

Last year, Whitman saw a 43 percent increase in applications. But Bridges is the first to admit that the strategy wouldn’t work in parts of the country with greater numbers of comparable institutions. “Some schools are positioned to do that, and others are struggling,” he said.

For that reason, other institutions are refocusing in response to changing student demographics. Converse College, a small women’s college in South Carolina, enacted a “tuition reset” in 2013, reducing tuition by 43 percent. “It got the message out that Converse is affordable, which led to an increase in applications. So far, the college views this initiative as a success,” Ekman said. “What seems to be emerging is that by identifying distinctive constituencies for new programs, you can counter the trends by doing something dramatic.”

Starting Points

While no two institutions are alike, and each must consider its own strengths and weaknesses, some common strategic priorities are emerging, experts said. They include:

Focusing on academics. While cost-cutting and restructuring efforts have spanned a wide range of operational areas, there’s growing consensus that institutions will have to directly address the core of what they do: instruction. “We are going to need to improve learning productivity,” Broad said. “We can see a path in which deeper learning can be achieved without a concomitant increase in costs. That’s an essential component to achieving sustainability.”The good news, said Louis Soares, ACE’s vice president for policy research and strategy, is that faculty are increasingly thinking about these issues not in response to administration demands, but as an imperative they must lead. “The academic and financial sides of the house are starting to come together,” he said. “To the extent that you can get more efficiency out of academic delivery, you have to have a far more intimate connection between the way you deliver academic work and the way you pay for it.”

First steps include establishing ongoing dialogues between presidents and their provosts and faculty leaders, and focusing on the idea that efficiency and effectiveness go hand in hand, Soares said.

Leverage technology. Even at institutions that don’t embrace massive open online courses (MOOCs), online courses, virtual labs, early feedback, analytics, and breakthroughs in cognitive science all present opportunities to rethink instruction. Consider technology not as a tool to reduce costs, but to increase the ability to support all students, experts say.

“We used to think scale and customization were opposites,” Broad said. “These emerging new capabilities will allow us to achieve customization to the individual student at the same time as we achieve scale.” Soares added that tools such as dashboards can help develop a “collective vocabulary” among faculty and staff, helping build consensus around needed changes.

Involve all staff. At Wake Technical Community College in North Carolina, an initiative encouraging all staff to suggest ideas for change—and giving them raises if they did so—yielded more than 1,100 ideas in 2012, ranging from online courses to new roles for faculty members.

Consider scale. Initiatives that reach new kinds of students can justify the kinds of significant investments needed to change institutions. “Achieving scale is more important today than I can ever remember it being,” Broad said. “Investments in major changes can be recovered by the scale of the numbers of students you are able to serve.”

Support students. Initiatives such as block scheduling, advising, curriculum changes, and cohort-based student-flow models aren’t just cost-effective, they help students—particularly the nontraditional students entering most campuses—to succeed. “There’s a lot of conversation about trying to find the sweet spot between cost-effectiveness and educational effectiveness,” Wellman said. “If institutions adapt to serve the students who are there now and not the ones they wish they had, they can survive,” she added.

Improve dialogue with policymakers. “We have got to have better dialogue and informed dialogue,” Wellman said, pointing to efforts in Oregon and elsewhere to bring additional stakeholders into policymaking. “You can’t just do this from the institutional side,” she said. “You have to have state policymakers who own a piece of both the problem and the solution.”

Strengthen leadership. Along with presidents focused on sustainability, institutions need to develop their boards’ capacity to make forward-thinking decisions. “We need good boards to help lead,” Wellman said, urging presidents to “improve their knowledge base and get them focused on sustainability and value.”

Maintain focus. While overall trends will remain challenging, leaders must focus on their institutions’ unique strengths and needs in shaping strategies that ensure sustainability. “One of the great strengths of American higher education is its diversity,” said Broad. “I think we’re going to see not less diversity, but more. If institutions can focus on a niche and sustain it, they can continue to thrive.”

Mark Toner is a freelance writer based in the Washington, DC area.


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