Can higher education get creative enough to make ends meet?

Hearing about school budgets shrinking and the tough position that puts higher education in is kind of like hearing the story of The Boy Who Cried Wolf. I can’t remember a time in which people weren’t talking about how budgets have been creating undue hardship for educational institutions. In former jobs, I crunched the numbers on school closures myriad times; the bottom line has always been that margin compression has been getting worse and worse over time. Some segments of higher education have been worse off than others, but the reality is that everyone, in general, has not been doing so hot.

Higher education funding has been increasing every year over the past, let’s call it 30 years. But the increases in funding — primarily from state dollars — have not kept pace with inflation and enrollment. So in effective terms, schools are receiving hundreds of dollars less per student now than they did in, say, the early 90s. Additionally, with every recession, state education budgets gets decimated and take the better half of the next decade to recover. In in 2015, 29 states had less education funding that prior to the recession; recently, that number was still 12.

Schools have managed to weather the storm until through creative means. This essay covers how schools have scarped by until now — by cutting costs in the 2000s and increasing revenue in the 2020s — and then explores the idea that schools need to reimagine their core functions and service delivery model in order to stay not just competitive, but alive.

Cost cutting: the early 2000s recession through the Great Recession

Higher education administrators really did not do a good job at dealing with margin compression initially. After the Early 2000s Recession, they started to outsource cost centers of their institutions. Common examples of outsourced activities include dining, facilities management services, security, stadium management, energy rate management, hardware asset management, bookstore management, or even endowment management. A good deal of the justification behind outsourcing came from administrators who contended that some of these activities did not constitute core functions of the university and therefore should be managed by someone else. I think that philosophy of the role of a higher education institution makes pretty good sense for some of these functions. I don’t know anything about energy rate management, but if you are a higher education administrator and you are approached by a company that can get you a better rate on energy because they bulk buy from primary energy distributors, then I think you’re being given a pretty sweet deal — and I do know energy negotiation is really not the business of the university.

Energy negotiation notwithstanding, the outsourcing sometimes went too far and cut off services that probably should have stayed in house. Consider dining. I actually do sympathize for the university CFO who said, “Ok, we are hemorrhaging money, what can we outsource to save some money? Dining sounds good … providing food is not the mission of the institution; we are not a restaurant.” Except that maybe higher institutions are, in a way, a restaurant? Nobody is suggesting they need to be on the hunt for a Michelin star. But it’s equally conceivable that somebody drafting up their philosophy of education before starting a university thinks to themselves, “It’s not enough that we teach these kids; we need to make sure they have wraparound services that foster whole person development: intellectual, emotional, and physical. As part of that, we are going to make sure they are fed with tasty, nutritious food, so that they have a standard of eating that persists into life after higher education, and will hopefully carry on to their future families in years to come.”

That seems like a noble goal! I think if you floated that idea by the founders of many great institutions, such as the founder of my alma matter, Northwestern, they’d probably think, “That’s a really good idea!” especially if they could peer into the future and see the obesity crisis, factory farming, lack of nutrition in processed foods, food deserts, etc. The reality is that many higher education institutions outsourced their food service programs, frequently to large catering companies that performed other services for them as well, such as facilities management. The idea was simple: a specialized third party provider can deliver the same services at a lower cost because they are specialized towards delivering that service. A lot of times there would be special incentive-aligning agreements, too: if the third-party provider cut costs by X%, they could keep a portion of that X% as a “cost reducing finder’s fee,” or whatever legalese you want to call it.

That was a terrible idea! What do you think happens when outsourcing companies get to keep a percent of the costs they reduce? They try to reduce costs at every turn. They end up trying to deliver the service at as low of a cost as possible, which effectively runs quality into the ground. I have spoken with many university administrators who have echoed this sentiment. It’s outrageous! And the worst part is that in the time it took for these third party administrators to set up shop, the higher education institution generally loses capacity to rebuild their own dining program in-house. Doing so would require a lot of money (which they don’t have) and a lot of expertise (which they’ve lost). It’s not like you can just stop a dining operation and start it up again overnight. So then they are stuck with the outsourcing company in this terrible Catch 22. Your students are getting low quality food, and your vendor starts increasing pricing because they know you are stuck with them. I’m not trying to wag my finger, but decision makers probably should have thought a few steps ahead of their initial plan.

The reality is that myriad functions will have traveled down the same outsourcing path. This cost cutting through outsourcing was the reality of higher education budget management in the aughts. I am sure cost cutting is still going on, but when you think of the aughts, think of cost cutting. With that, let’s move onto the ‘10s.

Revenue expansion: the Great Recession — present

In the ’10s, the juice had been squeezed out of the proverbial orange: cost cutting measures had worked in that they helped alleviate the margin compression from decreased overall funding levels. Unfortunately, there was not much more cost cutting to do after that and funding levels continued to decrease, not to mention declining university enrollment in the 10s overall. The only other option, rather than cut costs, was for universities to make more money (generally, schools make more money by increasing enrollment). This phenomenon was widespread: even old-guard institutions without enrollment issues started to pull at their collars and think about how to increase enrollment numbers so more money would fall to the bottom line to help the institution stay afloat.

Universities did not find increasing enrollment to be all that difficult overall; they simply hadn’t been focusing on it yet. University administrators had previously focused on other things, like delivering good instruction, or participating in the capital expenditures arms race to stay relevant on the US News list (also relevant to maintaining enrollment), or cooking food for students (or deciding to no longer cook food for students to save money). Most of the methods of increasing enrollment sat with third party vendors of products and services who promised a very palatable proposition: for every $100 you spend with us, you will see an additional $X hit the top line of your university’s income statement. Not bad! These products and services came in a variety of forms, but I will focus on the three below that I think are the most interesting: (1) lead generation (increasing enrollments through better marketing); (2) student retention (keeping students once you have them); and (3) offering new programs (getting students through new product offerings).

Lead generation (“lead gen”) used to be as sophisticated as lower-ranking admissions officers traveling to regional high schools, setting up a booth in the gymnasium alongside 100+ other institutions during “college night,” and smiling and shaking hands with students who would rather be at home playing video games. It was not a particularly elegant system, but it was fun for stakeholders — it was personal, and it got the job done. This song and dance still happens under the purview of admissions officers but is augmented by services provided by professional vendors, including digital advertising and marketing, targeted outreach, search engine optimization, and all kinds of analytics software bells and whistles to help admissions officers make sense of their enrollment prospects. A good example of the activities performed by lead gen companies are the websites that read Explore colleges that fit your personality! and then ask for your personal information. These websites are owned by lead gen companies that will either sell your data to universities, or already have a preexisting relationship with a university that requires collecting your data. This data informs targeting outreach and advertising campaigns intended to get you to enroll at universities that need more students, because more students means more money for the institution, and more money for the institution means more money for the lead gen vendor.1

Then there are student retention companies (“retention companies” for short). Retention companies take the kitchen sink of student data available at the university, run it through their software, and come up with predictions on which students are about to drop out. The value proposition is particularly compelling not only because keeping a student from dropping out means preserving a piece of the university’s cash flows, but because it appeals to one’s sense of educational mission. Helping students persist is a good thing because education is good. At a basic level I believe that, and I imagine so do most educators and administrators as well. I have talked with numerous CTOs about retention software, many who of which told me tear-jerking stories of how retention software suggested that perhaps they reach out to a student because of myriad factors, and how said student would often respond that they were on the brink of dropping out because of working multiple jobs, taking care of family, etc., but that knowing someone at the university cared enough to reach out to them (and offer support services) was enough to keep them going. That feels powerful to me and so I think retention software is just peachy. Student retention software is not perfect, as it can sometimes be difficult to attribute a student’s continued enrollment to software in less drastic cases. Nonetheless if it can accurately make that prediction enough times, then it can demonstrate a clear ROI to universities by preserving revenue that would otherwise be lost.

The last type of revenue generator I’ll cover is online program managers. Online program managers (OPMs) contract with ordinary schools to help them take their current brick and mortar programs and offer them online. They make their money by charging a percentage of tuition revenue recorded by the online programs that they set up. Why would schools decide to contract with an OPM? Mainly, because they don’t see online school as part of the core part of the institution, and thus don’t have the expertise to build an online program. The first part of the reasoning is a bit ludicrous; the world is ever changing, and provision of education shouldn’t be defined by the medium of delivery. Delivering online education helps expand educational access to people who might not otherwise be able to access education, like the growing demographic of the non-traditional learner. However, it’s true that many institutions don’t really have the wherewithal to provide online education, let alone to do so successfully, so it makes sense that they contract with an OPM. Regardless of reasoning, it helps bring in additional tuition dollars of students that enroll in the school’s online program that wouldn’t otherwise enroll in the school’s brick-and-mortar program

What makes increasing enrollment a little bit different than cost cutting is that cost cutting can only go so far (there will always be fixed and variable costs associated with delivering education) but you can theoretically continue to increase enrollment ad infinitum. Look at Liberty University: They have over 100k students! That is very impressive on its own right.

How can higher education stay afloat? What needs to be done?

I’m sure that more cost-cutting measures will come along — such as companies disrupting the traditional textbook publishing status quo and enabling schools to purchase less expensive assessment software. I’m also sure that more revenue generators will come along — such as companies who decrease the summer melt rate by using chatbots that nudge students from graduation to their first college class (these are both companies that I like)¹. And although it’s true that every school is someplace different along their journey of cost cutting and revenue expansion, as a general rule of thumb, schools have made the straightforward cost cuts and have expanded revenue through most traditional methods. Truthfully, there are a finite number of costs to be cut and a finite number of third-party vendors that can expand a university’s revenue ad infinitum. Once you’ve applied retention software, there are only going to be so many at-risk students. Once you start contracting with an OPM, eventually you will take all of your programs online.

This uncomfortable situation of cost minimization and revenue maximization leaves one wondering what will happen next. Truthfully, it’s hard to say, especially when the P&L reality is that a school either needs to make more money or spend less money. The only game plan left is to continue the cost cuts and revenue expansion where possible, but think hard about reinventing the business model to begin to take non-traditional revenue streams.

There are a few possibilities that I think are interesting and hopefully you find them to be good food for thought.

• One possibility is that traditionally academic institutions become both academic and vocational institutions and start to offer trade classes. One of the most influential educators and researchers currently working has written extensively on the depth of cognitive skill required in vocational schooling, and I think it’s about time that vocational schooling get the same respect and adulation as academic schooling.
• Another possibility would be to start accepting money from employers for work placement arrangements and including workplace skills in the higher education curriculum. Many students are increasingly focused on labor market outcomes and so being able to advertise to students guarantees of labor market outcomes, while using corporate funding to make ends meet, seems like a winning proposition so long as you can maintain the overall integrity of the educational experience being offered.
• Another possible example would be for universities to start selling student data! I realize how draconian this sounds but the marginal detriment to students would likely be low (the amount of targeting advertising from social media data would surely eclipse anything wrought by student data). The revenue gained from selling student dining choices to Big Food might be worth the student-run community garden that data sales proceeds pay for (or whatever other project they finance).
• Perhaps we’ll see partnership fees for product promotion in the classroom. Consider a school that offers a cooking class and for each homework assignment, professors provide their class an Instacart link that has a basket pre-populated with the required ingredients; for this service, the school would receive a partnership referral fee from Instacart (you can use your imagination to figure the myriad other ways to collect such fees).

The possibilities are endless. And even if, at this point in time, there are marginally more costs to cut and traditional revenue sources to stretch, the reality is that these efforts can only go so far, and that the schools who most nimbly capture non-traditional revenue sources will be better able to survive in the prolonged and likely continuing era of dried-up education budgets. School administrators need only use their imagination to create new revenue streams (as hokey as that sounds), and mobilize the resources necessary to capture that additional value. Higher education is in dire straits but fortunately, necessity is the mother of invention. I am hopeful that American higher education institutions will meet the challenge.

1. Disclosure: I formerly worked at Reach Capital, an investor in the two companies described here.