Risky Business: Higher Ed?

With apologies to Tom Cruise and air guitar, I am intrigued by the ongoing disruption in the world of Higher Education and the dramatically changing nature of the risks being taken. As universities of all varieties confront their strategic directions, they are rolling the dice on what the future will bring. The way for the future is unclear and difficult to predict. The recipe for transforming higher education is filled with peril as millions of dollars are being invested in untried processes, methods, modalities, tools and technologies.

It is clear that the disruption recognized by Professor Clayton Christensen of the Harvard Business School ( see my post of elsewhere on this blog) continues to unfold before us. Who would have anticipated even ten years ago that the tried and true systems of higher education delivery would ever change.? The sprawling physical plants, ever-larger buildings with luxurious appointments and features, were undertaken with complete confidence. More and more amenities were added to support the rising enrollment, even though the tuition was also rising. How could students continue to meet the tuition increases? Well, thanks to the largess of Congress, the student loan program enabled the accumulation of larger indebtedness with low interest rates, which provided the needed capital, along with the generous gifts of wealthy alumni and relatives.

The for-profit sector was on a tear as well. With both an on-line model that addressed the needs of working adults for convenience and also technologic tools that made the massive growth across the country scalable, this segment of higher education also enjoyed dramatic growth. With a substantial lead in the use of the Internet and related tools to deliver educational materials and facilitate interaction, this group seemed well suited to maintain technological leadership. Most of traditional higher education looked on from afar, confident that they were immune from the evolving challenges of digital education. So the non-profit sector cruised with technological leadership, swelling stock prices and the great attraction of college degrees for its target students.

The broader consumer motivation that supported the expanding educational offerings for both traditional and for-profit higher education was the ingrained belief that the best and surest way to advance in life, both intellectually and vocationally, was through a college degree. After all, the unemployment rate for new graduates was low and the lifetime earnings with a degree were significantly greater than non-graduates. Larger numbers of students entered the ranks of university students with the promise of the “good life” through education.

That world has changed.

Now the entire country faces deep recession and high unemployment. There is now a widespread belief that the promises of higher education can no longer be met. Large numbers of graduates are underemployed or unemployed. Students are graduating with loan balances equivalent to home mortgages. The aggregate of such loans now exceed the level of credit card debt. Defaults are larger and growing, with taxpayers footing the bill for the loan losses. The result is perfectly logical, but somehow unanticipated by the higher education community. Students are staying away in droves. The promise of a college degree has been greatly diminished. The prospect of large loan balances upon graduation, with diminished faith in job availability, has significantly reduced both the number of prospective students and the previously engrained confidence in the power of education.

The result? Educational institutions of all kinds are struggling to adopt strategies that will allow them to meet expectations and preferences of this rapidly changing population of potential students. This review and analysis not only requires significant commitment of time, research, experimentation and intellectual capital, it also requires huge capital investment to build, test and alter the methods that are developed. All of this is subject to the risk that all the investment will not succeed at reinvigorating Higher Ed.

This process is vital, demanding and above all, RISKY!

So the first issue that must be addressed in this process is consumer risk. Can the higher education community construct and offer educational models and modalities that reenergize students, that create market demand and a return to the elevated value of higher education? The present group of potential students are very difficult to understand. They are quite comfortable with technology, used to immediate feedback, unabashedly assertive at expressing their desires, sometimes put off by authority and maybe a little entitled. What’s more, these persons are coming along at a time of unprecedented societal change and rejection of many traditional values. How can we reach them?

Traditional higher education institutions have a significant amount of operating risk as well. In Finance this refers to the role of fixed costs in the overall cost structure of the enterprise. The greater the proportion of fixed costs, the greater the losses when volume diminishes. In this regard, most for-profit universities have an advantage in that their costs are more variable in nature – they have leased facilities and equipment, utilize adjunct faculty that can expand or contract with the student population. This does provide a risk advantage for the for-profit sector. Traditional higher education, on the other hand, has very large investments in capital assets, equipment, senior faculty contracts for teaching and research, expensive amenities and many long-term commitments for capital investment.

Any advantage enjoyed by the for-profit schools in the preceding paragraph is greatly exceeded by stock market risk related to the valuation of the university by its investor community. The aggregated level of risk quickly is reflected in the demand for more returns, which results in lower stock market valuation. The for-profit sector has lost millions of dollars in market value as stock prices plummeted over the last few years. The instability has diminished the ability of such schools to access the capital markets and placed them under intense pressure to contain costs and generate profits. This leaves them open to market corrections and economic disruptions, both very risky propositions.

And the growing reliance of all universities on the growing Federal loan program and the massive losses generated by record numbers of default have generated intense governmental scrutiny, which has translated into intense Political Risk. Senator Harkins’ Senate committee has introduced significant structural pressures on the Federal Loan Program and pushed for increased scrutiny and management of such loans. The committee has been especially vocal in its attack of the for-profit sector.

Closely related to this is the increasing review and oversight being exercised by regulatory agencies like the Higher Learning Commission. As bad actors in higher education drew more publicity and public disparagement, the regulatory agencies were criticized for failing their mission and not closely monitoring specific institutions. Congress threatened their very existence and put part of the perceived problem squarely on the shoulders of the regulators. This Regulatory Risk poses immediate and pronounced problems. A recent letter from the HLC has had a direct and material effect on the University of Phoenix as it attempts to deal with the issues raised by the HLC. (See my previous post, “Financial Structure: A Condition of Regulation? “).

Finally, all of Higher Education has to continue to deal with the potential liabilities related to operating vehicles, maintaining real estate, offering public activities and events and generally attending to business as usual. These risks are real and directly related to standards of performance and governance that are recognized in our society. The result is Activity Risk , tort related liability associated with negligence in carrying out the normal operations of the University, from Admissions to Cafeterias to Book Stores to distribution activities.

As can be seen by the foregoing, Higher Education is facing increasing levels of risk. Some of the risks are specific and can be met by insurance and other techniques. Some risks can be addressed by diversification and redesign of processed and methodology. But the greater strategic risk of reforming the nature of Higher Education is much more complex and potentially very expensive. So as various strategies are devised and millions of dollars are committed to new and untried concepts, we will be continually addressing uncertainty and changing demands. Hang on for quite a ride. This is really Risky Business!

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