Sunday, September 23, 2012

On For-Profits in Higher Education

For-Profits in Higher Education generate strong emotions, somewhat unjustly so. They are portrayed as money-grabbing student-cheating scams, and while there are cases where this is indeed true, For-Profit can innovate and deliver good education. In this day and age when the usual publicly funded model is coming under pressure, both because of availability of money but also as higher education is coming to be seen as a private good, For-Profits is a model one has to indeed consider. It is in the interest of the wider society, as well as Education Entrepreneurs, to have a honest debate about profits in Higher Education, or more specifically, on how much is enough.

Indeed, most countries mandate that while they like private investment in education, they like it to be in Not-for-Profit form. It is possible to argue against the absurdity of prescribing philanthropy: However, it is plain to see that such regulations only attract entrepreneurs who cut corners and set up Not-for-Profit form but make money through cross-charging and other less detectable means. Not-for-Profit does not mean Not-for-Money, one of them told me, quite justifiably so. However, insistence on Not-for-Profit form keeps the availability of capital limited, create less palatable practises and attract entrepreneurs of a different mindset into the Education business. 

No doubt where For-Profits have been allowed to flourish, most notably in the United States, some limitations of the model is already very visible. In the US, the more successful For-Profits are already publicly listed, and many more of them are owned by private equity. However, they have fallen behind in student attainment, and other outcome measures such as the rate of default on student loans. Even considering the intake quality, that For-Profits will often attract non-traditional students, their performance does not measure up against, for example, community colleges, who draw from a similar student pool. Besides, existence of For-Profits do nothing to stop the cost spiral, the biggest problem in Higher Education, and does not add much on innovation. If anything, the public and private Not-for-Profit universities have led the innovation and For-Profits mostly operated with copying the popular models and offering courses with highest demand.

However, most of the criticism of For-Profits comes from special interest groups, like teachers' unions, who justifiably fear some loss of privilege with the For-Profit form. The For-Profits indeed try to squeeze efficiencies and measure performance, and spend very little on research and only minimally on staff development, often relying on Adjunct Tutors and rarely ever offering tenure. The Teachers' Unions claim that this lowers the quality of student learning opportunities, which may be true, though the same trend prevails in the public universities, where the shift away from tenure is quite visible. Increasingly, the measurement agenda of funding bodies have driven the public and other not-for-profit universities, and one can possibly argue that the quality of research is compromised in a result orientated university. Besides, the Public Universities, with their large class sizes and reliance on graduate students to do the teaching, mostly because the tutors are too busy too teach because of their research or consultancy commitments, hardly offers a better model for student experience. 

Many of the elements For-Profits are accused of are already there at the heart of public education system. On the other hand, For-Profits often borrow one thing from their Not-for-Profit cousins, that the real sweet money in education comes from rent. The current thinking in Education is that it is important to create rent, through selective admission processes and investment in reputation, so that students become ready to pay an absurd amount of money for access to, for example, Harvard's class of 2012. This is the model most For-Profits would love to emulate. However, at the non-selective end of the market where the current For-Profits are, this often leads to a real estate war: Education regulators and parents often equate quality of education with quality of facilities, often wrongly so. The other rent that they seek to extract is the premium the working class students put on an imagined prospect of good life, which is often greater than those coming from middle class families: In other words, they aggressively sell the dreams of good life to poor students and often charge them a high premium in line with the value they attach to that imagined future. For-Profits who want to maximise revenue solely through creation and extraction of rent income often contribute to the cost spiral and does nothing to lift student attainment. They focus themselves on, guilty as charged, poor alternatives to the public and Not For Profit universities, as expensive but open to all comers.

All this needs to be interrogated now as we are in the middle of an era-defining recession, which may last a generation. This isn't a temporary business cycle thing, but one that changes our societies and politics irreversibly. It is hard to see the public subsidies to education growing the way it did in the last twenty years, yet we are going to require more skilled individuals to provide the increasingly complex products and services that we need. Therefore, the need for education that works is at an all-time high. So is its demand, with a billion people joining Middle Classes from India and China, and the African societies emerging into urban modernism. The Public systems of education has no answer to this explosion of demand for education, and Not For Profits offer only a limited solution. It would be incumbent on For-Profits to do the heavy lifting, to prepare a generation of middle class, and they can only do this if they can sort out their business model beyond the rent-seeking that they currently do.

So, in a way, we are a tipping point when higher education may emerge as a capitalist enterprise at the expense of the rent-seeking entities that exist now, but we also need a new model for this enterprise as the current models of For-Profit emulate too much of the rent-seeking behaviour themselves and do not seem to be sufficiently ready for the job at hand. For this, we may need to look closely at the very western thinking of 'Profit Maximization' at the expense of everything else, a model which is already coming under pressure because it is inherently unsustainable, from the perspectives human relationships and environmental requirements. This thinking, shaped in an era of slave trade, discovery of new lands and materials and colonial dominion, is at odds with our time of greater public responsibility and dwindling natural resources. Today, it is important to see a business organization's job to create a value stream over a period of time, and profit as a pay-off that the organization will draw at a given moment: In essence, a balanced view of long term and short term is extremely important if one has to build a sustainable business.

Such thinking is currently absent in For-Profit Higher Ed and needs to be introduced. Higher Education is a long term business by design and the value stream thinking is most relevant in context, far more than the traditional margin thinking that dominates western enterprise. It is impact, not margins, that defines the success even of a For Profit college, and one must therefore build capacity to create that impact, even if this moderates the short term returns on capital. This is exactly why endowment funds (where the institutions had it) or debt funding worked better in creating better institutions than money raised in public capital markets or the public money in the modern era, which is often tied to short term returns (as in the UK). It is possible to have a For-Profit enterprise without having the Profit-maximization mantra, as many organizations across the world demonstrate through greater commitment to customers, people and environment (ahead of shareholder returns). Higher Education still being in early stages as an enterprise, such matured thinking hasn't yet emerged in the sector: But it is time it does so.

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