Whats Wrong With Higher Education?

Observations from Industry Insiders

A white paper authored by Jeff Rich, VP from Stamats Higher Education Research
and Consulting

One might pose the question differently, asking whats working in higher education
these days; the list might be quite a bit shorter. With universities unable to balance
their budgets, state and federal funding diminishing, affordability making it harder
and harder for students to pay for college, and commercialization and technology
disrupting an industry thats changed very little in hundreds of years, its no wonder
university leadership teams are so stressed these days. We offer this white paper
with observations, data and insights that can help frame the problems university
leadership teams are dealing with.
We start with the premise that higher education is in the early stages of massive
transformation. Like many things in our polarized society, the top 10% to 20% will
be just fine, whether large comprehensive state institutions with athletic programs
that rival the pros, or prestigious Ivy League schools with billion dollar endowments.
These schools will not find themselves desperately fighting for market share. Its
just about everyone else that should be worried. For those not as familiar with the
higher education landscape, and for purposes of this discussion, heres a quick
summary of how to view the marketplace. This is an oversimplification but for our
purposes there are basically four categorizations of schools:
1. Private schools often focused on liberal arts that emphasize their four-year
undergraduate curriculums. These schools often develop a small to medium
sized portfolio of graduate level programming that tends to skew towards
business and education. These schools are generally tuition dependent and
also focus heavily on developing donor bases through aggressive alumni
outreach. These schools tend to be expensive, often costing $30,000 to
$50,000 a year before financial aid kicks in.

2. Comprehensive state institutions that generally offer undergraduate and

graduate programs and rely heavily on state funding to sustain operations.
These schools are still considered generally affordable, costing perhaps
$10,000 to $20,000 a year and in many cases getting far more applications
to enroll as undergraduates, then slots available to admit students.

3. For-profit institutions that are generally run like a business, often spending
30% to 40% of their revenue on marketing and are often focused heavily on
online learning. This compares to not-for-profit schools which may spend 2%4% of revenues on marketing. This is a key competitive advantage for the forprofits, as the perception that holds true today that traditional colleges and
university degrees are more desirable diminishes.

4. Community colleges and vocational schools that are often either prepping
students for entry into a four-year institution, or preparing students to enter
the workforce through vocational training. Enrollments at many of these
schools has exploded as many students look to defer costs by completing
credits at community colleges, or seek training to enter a career path
requiring vocational training.

Note - Within these categorizations there are many sub-segments that can be
broken down into smaller categories based on size, or academic focus, etc..

To understand whats happening in the market place we need to look first at the
factors colleges and universities cant control. These external market forces are at
the heart of many of the problems in higher education and many schools dont as
yet understand what they are. A student of economics would look at whats
happening and say the problem is quite simple, and its one that just about every
other industry has gone through at some point. For the first time ever, colleges and
universities are susceptible to the laws of supply and demand. Just think about this,
schools have until very recently enjoyed absolute protection in their geographic
markets. New market entrants were virtually nonexistent. Not-for-profit traditional
colleges seldom thought about geographic expansion outside their primary trade
area and getting accredited in new states was an expensive, multi-year process. As
a result, things moved slow in higher education and this made it easy to forecast
enrollments year-to-year, and operations could glide along smoothly as major shifts
in the market were few and far between. Enter the for-profit university. Schools
like the University of Phoenix, Cappella University and Rasmussen were able to
expand geographically and fund aggressive media campaigns to begin to gain
market share. Traditional schools have never viewed for-profits as legitimate
contenders for the traditional high achieving, college-bound high school senior. Plus,
academic traditionalist often snubbed their noses at the quality of for-profit
education and many continue to insist that quality education cannot be delivered
online, or that a for-profit school is more focused on turning a profit than student
outcomes. Then theres the prestige factor, regardless of the quality of the
education you receive at a for-profit, top employers would still view a job candidate

with a degree from a traditional school as a better hire than a candidate coming
from a for-profit school, particularly if the degree was conferred from an online
program. What traditional higher ed was not seeing because its generally an inward
facing industry was the shift in the market occurring, driven by the change in the
consumer perspective. The economic implosion of 2008 turned our society almost
overnight from one driven by conspicuous consumption, to one focused on
affordability and value. As Chris Farrell the former chief economics reporter for
Minnesota Public Radio put it in his book The New Frugality, were entering a cycle
where consumers are becoming more inwardly focused and are less concerned
about outspending their neighbors. In other words its not what you make and
spend to demonstrate your success, its what you keep.
While academic traditionalists were continuing to insist that the commercialization
of education and online learning would have negative impacts on student outcomes,
students growing up in the information and technology age were finding these new
ways to learn, the flexibility online learning was offering and the innovations
brought about by for-profits quite appealing. While Im not saying the majority of
students want to study 100% online, many prefer a mix of online and traditional
courses and traditional higher ed was slow to adapt.

*Source Stamats 2013 study of student perceptions

Because the prestige factor was still not associated with for-profit institutions and
online degrees were still considered inferior, traditional colleges and universities
continued to not consider for-profits as legitimate competitors. These generally wellfunded, more nimble and innovative for-profit schools that viewed themselves
unabashedly as businesses were about to ride the same wave that had transformed
so many other industries in remarkably short times frames. Just ask any out-of-work
executive from the newspaper industry, retailers or travel agents how the Internet
transformed their businesses.
As the 2008 economic debacle took hold, it masked what was really driving change
within the industry. Some schools were seeing enrollment gains, while many others

began to see early signs of enrollment declines. Many cited the economy, or pull
backs in employers offering benefits such as paying for employee education. A
student of history would look to the past to predict the future and say in periods of
declining wages and increased unemployment, colleges and universities generally
see enrollment increases as workers go back for retraining or young people delay
entering the workforce because jobs are hard to find.

(Source needed from Bob)

The mixed bag of results schools were seeing was hard to decifer. Laws schools
absolutely saw major enrollment declines driven by the poor job market with the
leading indicator being the drastric reduction in students taking their entry exams
(LSATs). Many (not all) graduate business programs such as MBAs also saw
declines in students taking their entrance exams (GMATs) and mistakingly thought
the same dynamic was at play (fewer students entering business school due to the
economy). What in fact was happening with MBA enrollments was much different
than with law schools. More and more business schools were dropping the GMAT
requirment and as a result fewer students were opting to take the GMAT. Schools
that actively promoted a no GMAT required message and/or began to develop online
programs generally were the ones that saw enrollment increases or were at least
able to fend off enrollment declines. Schools still convinced that online was not
relevant or the GMAT necessary generally saw enrollments begin to decline, some
severely. To compound the problem, schools in financial duress began to cut
budgets needed to market these highly competitive programs and that was exactly
the wrong thing to do. Many schools that were ablel to sustain their levels of
promotional activity continued to use media channels like billboards and bus wraps,

not realizing that the continued fragmenting of the media landscape and the shift to
digital made many of these expenditures absolute wastes of money.
The effects of the adoption of online education and the for-profits aggressively
expanding into traditional schools trade areas did not have as big an impact on
traditional undergraduate enrollments, yet many schools were also seeing major
declines in their undergraduate populations, particularly private schools that dont
have ivy league credentials or division I sports to increase their brand profile. What
was driving these enrollment declines was declining demographics (fewer students
in most geographic regions going to college) and the annual cost of attending a
typical private college reaching the point where the consumer questionsed the
value. Students not as familiar with the game colleges play with whats known as
institutional aid would look at the sticker price of a school and determnine that
$30,000 to $50,000 a year was unaffordable to them and eliminated many of these
schools from their consideration sets in favor of lower priced private colleges and
state schools with tuition, room and board much more reasonabaly priced. Because
schools dont like to talk about price, many refused to educate the consumer that in
most cases 50% to 95% of all students at private colleges receive some amount of
institutional aid, often with majorities of students only paying 40% to 50% of the
sticker price. This meant a student with a good academic record could in many
cases attend a private school for almost the same price as a state institution. Rather
than recogizing this opportunity and realizing that unlike other markets such as the
luxury car market where price truly does equate to prestige, in the education
markets the overwheleming majority of students are looking for value and the
reputation of a school that has often been around for 100 to 150 years or more will
not be bastardized if the school talks about the affordability of their cirruculum.
Instead, many college presidents continued to instruct their admissions and
marketing departments to focus on recruiting the high acadmic achieiving, low need
student that every other school in the country seeks to enroll. These students have
their pick of the lot and generally can attend any school they wish as admittance
and the funding of their education is not an issue. To capture these students schools
would be forced to offer richer aid packages driven heavily by discretionary
instituional aid. Institutional aid (or the money colleges discount their product to
attract desireable students) was fast becoming the drug that schools needed to
have any chance of bringing in their desired number of first-year freshman. As a
result, a schools net tuition revenue began to steadily decrease to the point many
could not balance their budgets.

(source)
When businesses experience periods of declining revenues they begin to cut
expenses and/or develop new products they think the market seeks. Well managed,
innovative schools did just that, conducting audits of their exisitng acaedmic
programs to determine market demand, quality and pricing competitiveness. Many
came to the determiniation that they needed to cut some programs, launch new
ones and begin developing online programs since that was the segment of the
market that was expanding. Hard choices now needed to be made and with a
culture of shared governance a foundation of higher education, universty
presidents ran the risk of losing the confidence of their faculties if they became too
heavy handed in cutting programs or mandatng new ones. Schools are not run like
corporations and the president who tries to may soon find themselves out of a job
due to a formal vote of no confidence from their faculty.
This led to the second wave of disruption that we find oursleves dealing with today.
The adoption of online education initially driven by for-profit schools considered less
pretigiuous, now being carried forward by traditional schools with strong brands and
funding to go after the market share. Schools like the University of Southern
California, Arizona State University and their partnership with Starbucks, the
University of North Carolina, and ivy league schools like Yale and Cornell
represented a new breed of not-for-profit. They embraced online education, MOOCs
and other technological innovations and further erroded the market share of schools
still stuck in their outdated perspective. Some schools like Southern New Hampshire
University and Grand Canyon University went all in and saw their enrollments grow
by tens-of-thousands. Compare this to the modest enrollment growth most private

schools seek and cant even maintain. For these schools a 5 or 10 student increase
in a given program year-over-year is all thats expected and in many cases even this
modest goal in unachievable. This dynamic further reduced traditional schools
market share leaving many in the situations theyre dealing with today and driving
some towards an inevitable permanent turning off of the lights.
If revenues are declining, why not just cut expenses to balance the books?
This is easier said than done in higher education. With approximately 70% of an
average schools expenses tied up in salary and benefits and a good portion of
these salary expenses tied to tenured faculty, the ability to reduce academic staff
was limited and many schools already found their administrative staff cut to the
bone. Some schools had the added problem of dealing with unions where collective
bargaining made it virtually impossible to gain reductions in salary and benefit
costs. What also fueled many schools unwillingness to address the issues created
by the institiuon of tenure was the belief that the number of full-time tenured faclty
was directly related to the perceived quality of the education and the prestige of the
brand. They also believe that eliminating tenure would make it impossible to attract
the best professors. While most would agree the ratio of full-time tenured faculty to
students or the ratio of tenured faculty to adjucts is important for schools focusing
on liberal arts-based undergraduate programming, many were again missing the
consumers point of view. When it comes to graduate level programming, many
students actively seek programs taught by those that have been there and done it
in the real world vs. just academic theory. Schools with marketing strategies that
recognized this broke from the pack and began talking about affordability, and the
value of professors who practice their acaedmic theory in the real world. Many
schools continue to compound these problems adding more and more tenured
faculty to their ranks each year, or blindly asking the question at their finance and
enrollment committee meetings how much should we increase our tuition costs
this year? often choosing the default norm of annual 3% and 5% increases because
they believe thats what their competitor schools will do. Other schools missed the
mark by focusing financial resources on build-outs of nice-to-have facilities like
student unions, dining halls and even rock climbing walls. (reference Mark Cubans
article Will Your College Go Out of Business?)

One school that broke from the pack on just rolling with annual 3% to 5% tuition
hikes was Concordia University St. Paul who rolled out a 30% tuition decrease for
the 2014 academic year.
(insert interview with Concordia)

What can colleges and universities do to change their trajectories?

Having now read dozens of schools strategic plans I can tell you most say exactly
the same thing, increase the quality of their programs and student outcomes, focus
more on hands-on or experiential learning, increase their selectivity (college speak
for only admitting the best students and creating ethnic and racial diversity),
increase donor support, etc.. Most would consider these activities obvious and
imperatives rather than initiatves that can create true distinctiveness in the
marketplace. Further, very few offered actionable concrete strategies and activities
to accomplish them. I would submit that even if many of these objectives were
accomplished, few schools would see their enrollments and revenue increase as a
result. Whats needed are operational overalls such as centralization or outsourcing
of some services, infusions of technology to create automation, new expertise, a
product the consumer truly wants and an understanding that all enterprises must
susatain their operations without being reliant on aid from the government and
donors.
While I would expect my comments to not be popular among academic
traditionalists, having had the benefit of working with dozens of schools and having
spent equal amounts of time over my 25 year working history in higher education
and the corporate world, I would offer the following roadmap back to financial
prosperity for colleges and universities dealing with some combination of these
dynamics.

1. Realize that even colleges and universities are businesses and begin to
run them like a business. This doesnt mean selling out your values or belief that
higher education is above commercialization, but you do need to realize that this is
where the world is moving, its irreversible and university leadership needs to
understand these dynamics and adopt more of a business attitude.

2. Understand that much like the housing bubble, education has reached a
point where the average American familiy cannot afford to send their child
to your high-priced institution. Instead of annual 3% to 5% tution hikes, go the
other direction and look to reasonably cut expenses and initiate cost saving
measures to increase operational efficiency. This can include outsourcing functions
such as HR, or consolidating and centralization of admissions and marketing staff
that often work in silos across different schools within the larger institution. While
this may not turn your bottom line instantly, it will start to change your trajectory
and position your institution to be competitive in the future.

3. Leverage technology to reduce staffing needs and automate some

services. Even the government has begun to adopt technology to increase
efficiency. Why are colleges and universities so resistent? Initiatives like one-stop
shops where admissions related activities from applying and registering for classes,
to dealing with financial aid, to academic advising can occur online or through the
consolidation of these often disparent services. Schools get the added benefit of not
forcing their students to visist three or four different offices and speak to staff who
often are not coordinating among themselves. This is an example of a consumercentric strategy as opposed to forcing the consumer or student in this case to adapt
to whats an inefficient and often frustrating process.

4. Address the elephant in the room and begin to phase out tenure, and
dont be afraid to hire adjuncts. I realize this statement will not be popular with
academic leadership. But lets face it, for many institutions this is a life and death
issue. My perspective may also be skewed from my corporate experience where no
one is above losing their job for poor performance or disruptive behavior. While
many might point to these realities as the primary rationale for severely limiting or
even eliminating tenure, I would offer an added perspective. Tenure was origianlly
developed to protect academic freedom, and to give faculty an unshakeble voice as
part of shared governance which is the concept most schools operate under. This
concept is foreign to most people from the business world where a companys CEO
and executive team pretty much have the ability to drive their strategies and ideas
down through the organization without disruption. Not so in higher education where
most things are done by committees that represent faculty, staff, students, and
even alumni sometimes. The flaw in the concept is most of the time groups other
than executive staff are not party to key information that drives more effective
decision making, nor do many of these committees and individuals have experience
in the things theyre being asked to weigh in on. Another tennant of tenure is
facultys ability to speak out against poor or even incompetent management by
university leadership. Ive seen a number of schools rebel against inneffective
presidents, going so far as to cast votes of no confidence using tenure as a shield

from losing their jobs for speaking out. In most cases Ive seen the president survive
as their boards attribute facultys actions as perpetual faculty unrest and
kermuginlyness. Schools with boards made up of clergy or other individuals with
more loyalty to the institution then the president and executive team tend to take
facultys actions more seriously. Boards that have been hand-picked by presidents
and often are dominated by individuals from the private sector often side with
presidents because it was the president who solicitied them to join the board and
they have a strong sense of loyalty to support them. This is a dangerous dynamic
and has led to many institutions moving closer and closer to insolvency with no
possibility of bringing in more competent leadership.

5. Make marketing a priority in your organization. Because schools

historically did not have to fight for students the way they do today, many
university marketing departments are ladden with communications staff that dont
understand marketing. With communications departments staffed by people who
have no real experience in marketing, they often focus on the wrong activities
putting enormous amounts of human and financial resources against things that
wont solve their enrollment problems. One example I can offer is my experience
working with a school that saw its enrollments in freefall. They were doing
absoltuely nothing to market their programs while staff spent all their time
developng the best looking alumni publication in the business. They spent their time
developing brochures and posters that would never see the light of day outside the
institutions four walls. None of these activities were focused on reaching audiences
that were outside the shools exisiting community and would therefore have no real
effect on attracting new students. What made fixing the problem even harder was
the lack of any new funding to intitiate the kind of chnages and new marketing
activities that were needed to turn the enrollment picture around. This meant that
this particular school had to go through the process of refocusing its resources
around activities that reached the outside market and would truly have a positive
impact on enrollments. I recall one situation where a staff member insisted on
maintaining a $60,000 annual photography budget while there was no money left to
use that photography on inquiry and enrollment generating media. Rome is burning
and its inhabitance is still clinging to their decadent lifestyle! Some may have
graduated from their school and moved right into marketing departments having
gained no real experience in other organizations and because higher education has
not viewed marketing as an essentiual activity, their willingness to attract better
talent and pay competitive wages makes infusing universities with the human
capital to turn it around even more difficult.
6. Break-up your cabals. Every school has them. These are staff members who
have appointed themselves the keepers of their schools traditions and the
purveyors of closed-mindedness and resistence to change. Without question higher

education is one of the most resistent industries to change there is and cabals are a
major reason why. All businesses must adapt and change to remain relevant. This
involves infusing organizations with new ideas and new thinking. Cabals are antichange agents. They often stiffle change, make new staff members with fresh ideas
feel unwelcomed and anchor the organization in antiquated thinking that will push
their school eventually to irrelvance. Whats scariest about the power and
influenence of these cabals is that more times than not they have the ear of the
president and the president often viewes them as positive influences on their
cultures. They are not. Higher education needs to learn that some amount of staff
turnover is a good thing as the ability to remove staff members without the skills
needed today, or who have extremely disruptive influences on an organizations
ability to change and adapt will cause significnt harm to your organization and
cause many talented staff members to seek employment elsewhere.

7. Stop funneling so much of your resources into Advancement offices.

Again, a statement that probably wont make me popular with peers, but something
that needs to be said. For those unfamiliar with how universities operate, most
schools have significant amounts of staff focused on cultivating donars from their
alumni populations and corporations in their markets. While I would not advocate
ceasing this function, I would advocate limiting the amount of university resources
devoted to it and there are a couple reasons why. First, the return on investment
from adequately staffing a schools marketing, admissions and faculty is far more
important. Well run, profitable organizations get there by focusing on their core
product, in higher education thats the quality of their acaedmic programs which is
largely contingent in the quality of the faculty. When it comes to marketing, hiring
experienced staff and adequately funding a schools marketing and media plan to
attract students is now mission critical. The ratio of Development/Advancement
staff to the amount of donations they raise pales in comparision to the tuition
revenue college marketers can bring in by effectively marketing a schools
programs and brand. The other dynamic thats working against cultivating donors is
the shift in generational willingness to support their alm amater. Generations of 50+
year-olds are much more likely to financially support the school they graduated from
than younger alumn. Plus, younger alumn can and would prefer to be reached
through new methods of contributing such as crowdsourcing and other online
contribution methods. These tactics require less face-to-face donor outreach and
cultivation, and more knowledge and expertise in marketing and technology staff to
develop and run these programs.

8. Stop resisting online learning. University leadership needs to ignore facultys

resistence to online learning. Many faculty in traditonal univeristies will continue to
believe you cant deliver quality education online. This is just not true and I would

say this objection is irrelevant anyway. Theres no question this is where the market
is headed and almost all schools other than the most lofty when it comes to
academic prestige must adapt or continue to see declines in their enrollments.
While the window of opportunity to blaze the trail and breakway from the pack of
schools seeing enrollment declines is closing fast, schools need to now view the
migration to online not as a growth strategy, but a necessary expansion of their
business model in order to stay competitive and not become one of the victims of
the market disruption that will put some number of schools out of business in the
coming decade.

About the authors.

Jeffrey Rich is currently the Vice President of Agency Services at the leading higher
education marketing, research and consulting organization in the country. Working
with Stamats as a consultant and as an executive administrator within universities,
Mr. Rich has worked with dozens of schools across the U.S. experiencing the kinds of
enrollment and operational issues outlined in this white paper. His background in
execuitve administration at comprehesive universities, executive leadership at
Fortune 25 organizations such as UnitedHealth Group and Target Corporation, as
well as leadership roles at top marketing and advertising firms has given him
unparreled access to many of the top brands in the country and a birds-eye view of
how they operate. Mr. Rich can be reached for commentary regarding this White
Paper at jeff.rich@stamats.com or at 800-553-8878.