The Good, the Bad, and the Ugly in Bain's Higher Ed Funding Report

A recent Bain & Co report on higher ed, on sustainable funding, has irritated some people as much as their equally flawed analysis of admin costs at UC Berkeley irritated us. Most critics are responding not only to the report's claim that 1/3 of the country's colleges are financially unsustainable, but to the fact that this unsustainable group includes the richest universities on the planet, including Dartmouth, Harvard, Princeton, and Yale.  This does suggest on its face that their methodology doesn't make sense.

Yet the report also makes true and important points which I'll get to below, before discussing how the corporate consulting community is likely to use their interactive websites and exploding hairpieces for educational evil and not for good.

What the authors do is look at two ratios of financial health and locate the 1700 universities they reviewed on a nine-cell matrix.  Each institution is rated by its increase in expenditures to revenues (the "expense ratio"), and its decrease in assets to liability (the "equity ratio"), both of which are bad.  Unfortunately, the data behind their equity ratio ends in 2010, before endowments (and later, real estate) had started to recover, making schools look poorer than they are.  As for expenses, the poorest UCs, UC Santa Barbara and UC Santa Cruz, are more "sustainable" than Harvard and Princeton because they have lower expense increases, which in public Us we call "budget cuts."

But the Bain report's larger point is correct: over the past many years, colleges and universities have come to have "more liabilities, higher debt service and increasing expense without the revenue or the cash reserves to back them up."  The report is also right about a second issue: expenses did not increase so much for the sake of instruction as for the sake of facilities, interest payments, and administration.  One figure (left) shows that instruction increased at less than half the rate of increase of interest and debt.

 A second figure (below) confirms the ever-growing slice of expenditures consumed by administration
 (see previous studies of UC and national admin growth).

Bain should be used to help us focus on a fundamental and terrible fact:  the high tuition/ high debt model has NOT actually created solvency for the overall higher ed sector, even as it has impoverished college students and families. You would have thought that these huge tuition increases over decades would have put colleges on firm financial footing. But that is the case only for that subset of colleges that were already prestigious and wealthy. The majority (more than Bain's 1/3) who serve the great bulk of college students are either in trouble or living from year-to-year. 

 Bain's best recommendation involves how to respond to this general financial problem, and that is to develop the institution's core activities and cut the rest. Bear with the management speak:

Colleges and universities frequently aspire to be the same thing, with a focus on moving up to the next level and gaining greater prestige. It can be far more about “me-too” as opposed to carving out a unique strategic position. As a result, most of the strategic planning that happens in higher education is on the margins  . . . [But] the core is where high-performing institutions invest the most and generate the greatest returns. It is the area where they are the clearest about the value they add. It is the domain where they are the most differentiated and the place from which they derive their identity. . . . In any industry, there are three primary paths to competitive advantage: differentiation, low cost or structural advantage. The trick in pursuing a differentiation strategy is truly understanding your unique core and then focusing resources on it. An implicit part of having a focused strategy is not only defining what you are going to invest in, but also clearly articulating what you are not going to do.

 The Bain authors are right about the fundamental role of prestige and rank-seeking in driving unfocused spending, particularly on capital projects.  The are right about the solution, which is to return to the educational core, aka teaching and research. They are right about another thing too, which is that a particular institution's core can't be generic or undifferentiated. A college or university needs to be clear about its academic goals and the particular fields it's going to develop in order to pursue them.  This means real planning and not the pursuit of general excellence and continuous growth (which they call the Law of More).

I have one final comment on the good before I get to the bad and the ugly.  Planning for Bain does not literally mean budget cuts with the goal of competing on low costs. (They will be read that way, for reasons I explain below.)  Planning means having real educational strategies, cutting admin and support costs, and spending money on core innovation rather than on full-service expansion.  Planning means administrative restructuring that deals with fragmentation, redundancy, unneeded hierarchy, budgetary opacity (not their term), and excessive complexity.   Planning also means that you don't just dive into a new initiative without knowing what you are trying to do with it. 

So the Bain authors are all in favor of online instruction, but they also warn that it can be yet another "me-too" grasping for salvation.

There is no question that the online market is rich with opportunity, but until you have defined your core strategy and identified significant capital to invest in creating academic value, you will not survive in the online arena. For some institutions, rushing into the online space too rapidly to grow enrollment and create new revenue is another me-too strategy. There are already too many entrenched players and new entrants with significant capital in the market for an undifferentiated strategy to succeed.

This obviously applies to the University of Virginia Board of Visitors' emails about how Virginia needs to get into online because everyone else is, and probably to the UC Berkeley alliance with Edx and other forms of MOOC mania, which are supposedly both a free service to humankind and huge future profit centers.   How exactly is the Edx alliance going to achieve UC Berkeley's stated goal of increasing the quality of campus education? And why would we be reassured to know that "only one of the many initiatives in on-line education that we are — or expect to be — undertaking as we continue to develop our aspirations and strategies for on-line education at Berkeley"? This sounds like there are a lot of deals and brandings going on at Berkeley, but not like admin has a plan.  Bain might succeed where faculty have failed to convince senior managers that they need to know what they are doing before they pile in.

As for the bad:

First, in marveling at the failure to reduce costs, Bain compares the university's "experience curve" to "Moore's law." This suggests they think that universities are basically old-fashioned information technology companies that can now finally use technology to replace workers and cut costs.  In fact, the relevant economic "law" is Baumol's cost disease, which refers to the fact that complicated human labor practices don't get cheaper as technology advances.  As the economists Robert Archibald and David Feldman point out, "the computing revolution of the last thirty years has only served to increase the [higher education] industry's dependence on skilled labor" (page 85), which has increased labor costs  (and legitimately so, since the point of complex labor is to increase a service's quality rather than to reduce its costs).  By making the mistake of comparing rising college costs to (falling) costs for semiconductors, Bain stands the role of technology in universities on its head: technology increases our costs, rather than reduces them. 

Next, Bain takes the cuts to public funding as a fact of life rather than as something to be fought, and then assumes throughout that reengineering can make up for these cuts.  The premise is false. I won't repeat our many posts on this subject, but will say that most of the measures they suggest, such as cutting support rather than core, have been happening at campuses like mine for twenty years.  They delay educational decline, but they renew nothing, and they only serve as the starting point for further cuts.  Other examples are primarily of academic department consolidation (e.g., Cornell going from five to one economics departments). The obvious takeaway for policy makers is that colleges don't need more money because they've been overspending, so what they need to do is take more cuts.  This is a wrong and disastrous lesson.

Third bad, possibly ugly: this report assumes the agents of reform will be academic executives.  My suspicion here is fueled by Bain's actual practice at UC Berkeley, where Operation Excellence, which might have stuck to doing useful things like reducing the number of supervisors and consolidating vendor contracts, but has instead devolved into a quasi-outsourcing exercise involving the involuntary migration of 650 staff into a newly leased building several miles from campus. The announced net financial savings of "shared services" have fallen and are dubious at best.  So are the increased workplace efficiencies, since lumping people together in functional units simultaneously destroys the "cross-functional units" otherwise known as departmental staffs taht are supposed to work with local faculty and students, and who now will not be.  (The "50 percent" rule -- you leave if your work is more that 50% "shareable"--could as plausibly be used to define staff that should stay in campus units.)  The deeper point is that the destruction of on-site working groups and department based collaborative structures would never happen in this wholesale way were frontline employees equal partners in the planning process.  Anyone who understands organizations knows that sustainable and creative change has to come largely from below.  That's not the message of this report.

The crucial thing to remember while reading reports like this is that upgrading the educational core will

not come from top-down pronouncements and hectoring, but from faculty, staff and students working in collaborative environments not destabilized every few weeks by the management idea du jour;
not come  from disruption as such;
not come from budget cuts;
not come from technology per se.

Renewal will come from each institution's complicated creative processes as tied to real, frontline experiences of teaching and research, which allows for whole community's articulation of its needs and contributions to society overall. For that to happen, the sound of these reports will need to change.