Renovating the Higher Education business model: Three steps to saving money without sacrificing quality


In a December 13, 2018 Forbes article, Will Half of All Colleges Really Close in the Next Decade, contributing author and co-founder of the Clayton Christensen Institute, Michael B. Horn, states what many academicians already know – the business model of traditional colleges and universities is broken. Horn has been touting this mantra for some time, calling on higher education institutions to stop ignoring the disruptive trends taking the industry by storm. These disruptive factors, like the rise in popularity and credibility of fully-online Universities, the unionization of adjunct faculty and the political uncertainty for international student visas, tell only part of the story. An institutions’ inability to adapt is further complicated by antiquated faculty incentive systems and overly complex funding models.

Clayton says, “many colleges are increasingly unable to bring in enough revenue to cover their costs.” And he’s right – tuition increases have not kept pace with construction costs, student service demands, or faculty and staff salaries. For public institutions, state funding cuts, coupled with pressure to keep tuition rates artificially low, leaving many operating in a deficit. Reliance on private fundraising has exploded across the country, extending even to community colleges, a sector previously removed from donor fundraising as a revenue strategy.

What’s the answer? The revenue issue is merely a symptom of the larger problem – higher education administrators need to seek ways to revolutionize how they deliver their services and change-up the current operating model. There are a few ways they can do this.

Step 1

Focus on using “economies of scale”. Traditional businesses leverage their size to demand lower purchase prices, resulting in cost savings, so why can’t universities adopt this same strategy? As a human capital business, institutions are not traditionally set up to deliver services in a way that allows them to use leveraged models for academic program offerings. The explosion of online delivery is often touted as student-convenience focused but from an operating perspective, this option is also an excellent example of an economy of scale. The future of higher education depends on discovering additional delivery models able to leverage more economies of scale.

Step 2

Break down silos. Currently most institutions operate like a grouping of smaller institutions. Divisions, Colleges, or Departments are often siloed in both course delivery and funding. These silos have real world consequences for both the faculty and the entire University.

Let me provide a practical example. If an economist is hired by the College of Business, that college bears the full weight of his or her salary and will ask them to teach a variety of courses to recover that cost. However, if their research is focused on migration economics, their expertise would be best used to teach these concepts across three different colleges (i.e. Business, Sociology and Social Science) to share this knowledge with the greatest number of students.

The most common higher education funding models are not cross-college compatible, so it becomes more challenging to take advantage of economies of scale such as this one. And more importantly, this siloed approach is a major obstacle to achieving the best and highest use of faculty time and student learning outcomes. Many institutions attempt to solve this issue by creating cross-discipline programs or Institutes, however accreditation barriers and strict academic handbooks often hinder their acceptance or prominence.

Step 3

Choose the Right Incentives. It is no secret that incentives drive behavior and behavior drives outcomes. In a University setting, faculty are incentivized through the tenure process focused on research, student course evaluations, and to a lesser extent, service to their department. However, institutions looking to truly foster innovation need to look beyond the tenure process and provide incentives that reward cross collaboration, risk taking, and transformative teaching models.

Institutions like the University of New Haven give instructor stipends for the development of hybrid undergraduate courses that include active learning initiatives using digital tools. Other institutions look to the local and state community for niche program needs and incentivize faculty to become trained to teach in these areas. Regardless of the strategic goals of the institution, aligning faculty incentives is critical and will pay dividends in the long run.

These and other business model disruptions are as important to the long-term future of higher education as investments in people and assets. To achieve success and develop their unique selling proposition, institutions must make honest assessments of their business model and determine their own low-hanging fruit of change.

1 Shocker: Professors Like to be Paid. Mark Lieberman. Inside Higher Education.

Publish Date

Posted on January 10, 2019

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