Predicting the Future University Business Model podcast with Dr. Drumm McNaughton and Gerry Czarnecki looks at how COVID has accelerated the changes in the higher education business model faster than anyone had expected. Colleges and universities have been facing this day of reckoning for at least five years; leaders knew that change was coming and many were focused on strategic thinking about these impending changes, but that day has arrived faster than the vast majority thought would happen.
The pandemic has forced the entire university business model (which includes financing, delivery systems, and who manages and controls what) to transform. Institutions have had to come to terms with the realization that they cannot continue to operate as they previously have been functioning.
COVID and the Day of Reckoning
The higher education community currently consists of a wide variety of institutions including the Ivy League schools, community colleges, Tier 1 research universities (R1), and for-profit institutions. Moving forward, these institutions will have to figure out who their primary customer truly is—and that may cause the creation of smaller higher education communities. The institutions also will be separated by their own organizational nature and characteristics regarding their mission as well as their available financial resources.
Higher education leaders don’t know where the industry will end up. The whole higher education community may fracture to become multiple communities. If this happens, the various higher education sub-communities won’t know each other well.
For example, R1 institutions shouldn’t see themselves as the same as National University, which is an adult-learning organization with less than half of 1% of its students enrolling as first-time freshmen. The students at National University and the other institutions that are part of the system are, on average, 35 years of age and primarily working adults. Additionally, National and its sister institutions are entirely focused on creating a learning experience for students who are more adult.
This is very different from R1 institutions, so describing a first-tier R1 institution as “an institution of higher education” is in many ways a misnomer.
There is no comparison between R1 institutions and other institutions that are completely focused on educating students. These two institutions have virtually nothing in common, other than they are both called “university.”
Evolving University Business Models
The R1 university business model, which depends primarily on research grants and endowments, is not as challenged, except at the undergraduate learning experience. The research institutions weren’t ready for the current situation caused by the pandemic. These universities were using the legacy model of in-classroom experience on campus for their undergraduate programs, but due to the pandemic, all of a sudden, students couldn’t be on campus and in classrooms. These institutions didn’t have the technology or the operating systems in place. These institutions are essentially using Zoom to teach virtual classes and Zoom is not a learning management system.
Institutions at the other end are totally into higher education. These institutions’ primary business models are tuition and room and board-driven for their revenues. At National University, research grants are less than 1%; at the system level, research money is an exception rather than a rule. The system’s institutions also have a modest endowment, but primarily revenues come from tuition. This is a dramatically different business model.
There are a massive number of institutions that are in the middle and will be redefining themselves over the next few years instead of the upcoming decade. Those “middle” colleges and universities—which are trying to combine the model of research/academic pursuit of new knowledge as well as the model of teaching students—are the ones that have a business model that will be the most challenged.
- They don’t have the grant money to subsidize their activities or the heavy endowment numbers to subsidize students.
- They face increasing pressure in trying to continue their enrollment strategy (which is being challenged by the pandemic and the upcoming enrollment cliff).
- They also face cost pressures to be competitive in the marketplace.
This is making it more difficult to provide the same learning experience that they are used to providing.
Size of enrollment and endowment will be key deciders as to whether an institution survives. In the National System of institutions (which is a non-profit organization), there are a variety of institutions, both in size and focus. One of the institutions that were the smallest no longer exists now and its programs have transferred to other system institutions – the system could not figure out how to make the economics work to keep this small university alive, so it has been closed.
Embracing Online Education
All institutions will need to find other—and better—ways than Zoom to teach courses online because this desire for online education will not go away after the pandemic is over. This move wasn’t expected to happen this quickly and presents a huge challenge. This change also presents a major cost curve, which will challenge the institutions in the middle.
The pandemic has forced an acceleration for online education. National University had a strategic plan of where it wanted to go—to become a completely asynchronous online university. COVID did the institution a favor because it forced faster movement than the system could have done on its own without facing stakeholder repercussions.
National was founded as an in-person institution, but by a couple of years ago, it had transitioned to a point where half of its classes were in-person and the other half online. The pandemic has accelerated this transition by 3-5 years and the system’s institutions are now totally online as of today, and all but one institution in the system has transitioned to asynchronous online education. As a result, the system is liquidating real estate, including selling the university’s system’s headquarters, and getting out of leases, as classrooms are no longer needed.
Increasing Board Accountability
Corporate America has gone through a massive transformation in relation to its board governance. These boards are far more fiduciary, independent, and focused on their role on strategy, governance, and oversight than they were two decades ago. CEOs are accountable to boards.
That transformation has not yet happened in higher education governance, and while this change is beginning to emerge, higher education governing boards are far behind corporate boards in completing this transition. This has a lot to do with the fact that these institutions and systems utilize volunteers as board members. It is hard to ask volunteers to spend the time and do the amount of work that is necessary. In comparison, many corporate board members are paid to serve on boards.
Thus, the higher education president or chancellor tends to be the key player in the institution’s decision-making processes. However, tension builds when the enterprise is at risk and trustees start asking whether the institution is going to make it. Furthermore, non-profit boards still have the same fiduciary duties as their corporate counterparts – they can be held legally liable and professionally responsible for mistakes.
Ultimately, this period of change will not be an easy transformation for higher education boards. Trustees need to know that they are going to have to spend more time doing this work, especially during this pandemic, and accreditors will need to relent in their unwillingness to allow institutions to pay trustees.
Three Recommendations for Higher Education Trustees
Czarnecki suggested several takeaways for higher education trustees:
- Make sure you completely understand the educational and business model that exists at your enterprise, as well as what higher education is. How does the organization operate? Understand the rules as well as shared governance. Be well informed and educated about what is going on.
- Trustees’ top responsibility is making sure the right leader (president or chancellor) is in place to run the institution.
- Board members need to be actively engaged in deciding the strategic focus of the enterprise. Don’t delegate this to the CEO.
- The changes created by the pandemic—which are accelerating the change that already was underway—may cause the higher education community to split into groups based on their mission and the students they serve.
- Institutions are going to end up differentiating. For example, research institutions are focused on learning, knowledge advancement, and education. The faculty is learning and advancing knowledge, and then teaching students. In comparison, other institutions are focused solely on teaching students.
- These differences have implications for business models. Research institutions primarily are financed through research grants and endowments, but the pandemic has brought forward issues related to undergraduate education. These universities have focused on a legacy model that focuses on the on-campus classroom experience. However, they have not done well with the transition to online education in the wake of the pandemic. They primarily have focused on using Zoom for classes; this needs to change in the future if they plan to appeal to students.
- Colleges and universities that are trying to combine the model of research/academic pursuit of new knowledge, as well as the model of teaching students, are the ones that have a business model that will be most challenged. They don’t have the grant money to subsidize their activities or a large endowment to subsidize students. They will face increasing pressure to maintain their enrollment strategy and cost pressures to be competitive in the marketplace.
- The size of enrollment and endowment will be key deciders as to whether an institution survives.
- The pandemic has forced an acceleration for online education. All institutions will need to find other—and better—ways than Zoom to teach courses online because this desire for online learning will not go away after the pandemic is over.
- Higher education is far behind corporate boards in focusing on accountability and transparency. This has a lot to do with the fact that these institutions and systems utilize volunteers as board members.
- Because the work of trustees has not been brought up-to-date, the higher education president or chancellor tends to be the key player in the institution’s decision-making processes. However, when the enterprise is at risk (as it is in this pandemic), tension builds, and trustees start asking whether the institution is going to make it. They also have to realize that they have a fiduciary responsibility when serving on the board.