Friday, June 29, 2012

Among the Believers: My Adventures in For-Profit Higher Ed

I wrote about arriving at a break point a couple of weeks ago, and I intend to follow it up with more concrete plans now. I am fast arriving at a point of crisis, when I have started questioning the worth of my day-to-day activities, even if they are financially rewarding. The desire to do something meaningful gets me out of the bed every morning, and after spending twenty years in For-Profit education companies in various sizes and forms, I have started questioning whether I have always been barking up the wrong tree. I have a theory about commercial enterprises - that companies can only make money serving a socially useful purpose - and I shall claim that my early career spent in IT education proved that this was indeed the case. However, as I traveled, I have started discovering the other side of the coin, progressively, encountering in various opportunistic enterprises with business models founded on exploiting arbitrage and extracting the advantages of regulatory failure. I have remained true to my original premise and tried to steer the course, wherever I worked, on the 'greater purpose' thesis: I must admit I had only a few takers.

I shall claim that this may have resulted in underachievement, at least in financial and career terms, on my part. I was never playing the game I was in. I was almost always too idealistic, and often, ridiculously so. There were moments of self-realization when I would think of giving in and adjusting to the 'spirit of the age', but I have failed. To give an example, most of the For Profit higher education industry thrive on information asymmetry, the opportunities presented because educational opportunities are never exactly comparable and because the students don't know what to ask for, but I have missed this point (though I understood it to be a common practice) and believed that a sustainable profitable education enterprise can only be founded on openness and transparency. I have been laughed at, and indeed lived through the moments of crisis of confidence believing I got it all wrong. However, so far, another theory, which I developed along the way, that sustainable commercial education companies can only be built within a robust regulatory environment, which creates the right incentives by discouraging information asymmetry and insisting on students' rights, not in the absence of it. 

However, in most of the For Profit education sector, such talk is taboo. The denial goes under the label of 'action orientation', that one would rather do things than think about it, or more crudely, make hay while the sun shines. Modern entrepreneurship seems to have borrowed more from robber barons than the honest traders who built foundations of great businesses, at least some of them. I have spent most of my growing up years with my grandfather, who was a businessman who believed in paying taxes, hard work and honest dealings, of whom I have written previously (How I Got Here, Lessons I Never Learnt, and Entrepreneurship Redux), but he obviously taught me business lessons which were no longer valid. Now, while I obviously understand this, the question is what to do: Whether I sign up to what's around me, or keep resisting (and preaching a way of life that is apparently impractical). 

I remain convinced, however, that the For-Profit Higher Education has an unique social purpose (see here), and it should exist alongside other forms of Higher Education. It is not one or the other question, but it is about developing an ecology of education institutions serving different segments. I believe one needs to think what the right ownership structure is to serve this social role appropriately. Owner-Operator models, as in Britain, have their own limitation, and it sits uneasily as a poor cousin of public universities, who, with their publicly funded infrastructure, scoff on the sector for the lack of it. Private Equity often gets it wrong too: They are usually very smart people with a hammer, which presents a double problem, as they not only see nails everywhere, they can even reason why it should be nails everywhere. In short, their squeeze the margins approach does not work, because it is not about squeezing the margins in Higher Ed that makes it profitable; it is being able to create long term value. Companies driven by public capital markets do no better, as the quarter-by-quarter growth requirements fits badly with education's capacity-first business model. 

However, one must remember that most of the world's finest universities are private universities. In the US, land of universities, public money only contributes less than 20% of even a state university's budget. There are obviously successful business models in the sector one needs to look at. Agreed that all the universities that I am referring to are not for profit, but they generate surpluses which will make any for profit salivate. My key point is while For Profit may remain For Profit, getting rewarded for playing their social role, they must also learn from successful business models in the sector. There could surely be socially accountable (not just financially accountable) governance structure - it is a no-brainer if one accepts that profits is a reflection of social value the institution creates. There are buzzwords like social enterprise which gets thrown around for such formations, but we can simply call them purpose-driven businesses (strangely, not all businesses are purpose-driven), which puts customers first, employees second and shareholders thereafter, but operate on a win-win principle. 

It is important to recognize that For-Profit does not have to be Profit First, and maximizing margins is not the best way to run an education business. Rather, maximizing social contribution, which then feeds the reputation, which in turn creates profits, is the way to go. It is as measurable as anything, if that is a problem for fund managers coming out of business schools; one can easily construct a milestone driven business, which embeds the financial drivers into it. For example, 90% employability of graduates within the first 90 days after completing the course may mean 30% margin in the next operating cycle, and if these jobs offer at least a 30% premium of average graduate salary, that may mean a 50% margin. Starting with a dumb assumption that education businesses should have a 50% margin, which is exactly the kind of assumption fund managers do, is really, well, dumb, and not in line with the business realities of the sector. 
 
While I continue to live inside the sector, and sadly, deal with owner-operators or fund managers, I shall continue to research and talk about sustainability and social responsibility. I hope some day I shall be listened to, and I shall be able to create the college with a difference. I am conscious that there is a long way to go here; but I am also not planning to retire just now.

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