Vigilance and Viability
In NACUBO’s new book, Small College Guide to Financial Health: Weathering Turbulent Times, author Michael K. Townsley offers advice on remaining alert to the financial and strategic resources institutions need to withstand economic volatility. This excerpt explains the natural resilience of the basic business model for private institutions, while suggesting other options that may add value—including multinational initiatives and their benefits and risks.
Business models explain how an organization operates and generates income. The common elements of a business model are the buyers (students, in this case), pricing, production expenses, and financial structure. Private colleges and universities usually do not discuss their operations as business models or even conceive that they operate within the context of a business model. Nevertheless, it is important to consider different models because it provides a quick way of understanding what drives an institution, and many institutions looking for new ways of producing revenue need to appreciate the limitations of some models.
Moody's Investors Service neatly summarizes the business model for higher education:
Higher education has an “extremely resilient business model” with multiple sources of revenue and capital, inelastic demand, and “a seemingly unlimited willingness among parents and students to pay for higher education as a long-term investment in personal growth and career opportunity” ....Those qualities insulate the education market from factors [that] can deteriorate other sectors, like health care. (Scott Carlson, “Worsening Economy Could Cause Trouble for Smaller Colleges,” The Chronicle of Higher Education, July 18, 2008)
Obviously, the basic business model has helped private institutions survive the many vicissitudes in the economy and changes in student demographics over the past 40 years. As long as parents and students are willing to pay the higher price ticket for a degree from a private institution, private colleges and universities will survive and flourish. However, if the relationship between price and future payoff changes so that some sectors of the student market can no longer count on higher income to cover the cost of a private institution, then the willingness by some to attend private colleges may decline. There is already evidence that the link may be breaking between college degrees and higher pay for some disciplines. If these trends continue, some business models that focus on degrees with a reduced potential for higher income relative to a high school diploma may no longer be viable.
There is already evidence that the link may be breaking between college degrees and higher pay for some disciplines.
This business model has worked since the late 1940s when soldiers went to college under the GI Bill. They believed that a college education would improve their future and the future for their families. Enrollment reports for the fall of 2008 suggest that the model is under strain at least in private colleges. John Nelson, a managing director at Moody's, pointed out during an interview that if there is pricing strain on the model, parents and students will shift away from pricey independent colleges to less-expensive community colleges and public four-year colleges. There is evidence from the 1970s—when inflation jumped, tuition prices shot up, and the return on a degree slipped—to support the proposition that students will switch their enrollment preferences from private colleges to public four-year institutions. Additionally, in the 1970s, community colleges did not have the market presences that they have now.
Another factor that could place a strain on the business model is the way that tuition revenue flows to colleges. For years, the flow, even with state and federal aid, came though student decisions. Tuition flow is a set of smaller streams such as government aid, government-subsidized loans, private loans, and student cash covering the balance. Neither the government nor private financial agencies have compelled students to make choices based on the best price or some benchmark for quality (except that the college had to be accredited). Student payment balances have been small enough that students have not been forced to consider price, except for the best and priciest private institutions, in their attendance decisions.
Recently, though, the factor of price in student choice has changed at the priciest institutions, where they have removed price as a consideration because most students receive large institutional tuition aid packages and because high academic standards limit who can apply. So, price does not play a major role in choice even at the most expensive schools today. This is unlike the hospital industry, where a few third-party payees control the market and compel patient choice.
The recent credit crunch could change the dynamics in student choice, inducing them to consider price. As banks exit the student loan market or require high standards for a loan, the part of the revenue stream that undergirds student tuition payments could partially shut down. If this happens, and if the crunch remains in place for several years, students may take the option of switching their preferences from private colleges to public institutions. This could have a damaging impact on the business model and the viability of independent institutions that are financially fragile or heavily dependent on student tuition as the main source of revenue.
This chapter examines different models that typify most private colleges or universities, including tuition-driven, price-quality, residence hall, athletics revenue, endowment- and gift-driven, partnership, online, multinational, and market niches. There likely are more models, but this selection will show the variety of opportunities that are available to savvy presidents. Several models that are not common in the private sector are also assessed, for example, low price-high volume, minimum services, and combinations.
Some private institutions conceive that establishing a foreign campus is similar to finding the lost city of cold sought by the Spanish conquistadors.
This chapter provides a brief description of each model and discusses various aspects of the models, such as the financial structure, enrollment and pricing strategies, cost of production, and/or critical features. [Here we highlight one model in which many institutions have recently shown interest.]
During the last decade, as the Asian and Middle Eastern economies have taken off like skyrockets, more colleges are looking at moving overseas and tapping into these rich markets. Whether this is a realistic strategy depends on economic and political conditions plus a thorough due diligence analysis of the project.
The concept of a multinational university goes beyond the recruiting of students in another country, or offering study abroad programs, or even joint degree programs with an overseas institution. Multinational involves establishing a physical presence in another country where full academic programs are offered and are supported by the panoply of services and administration typical to a U.S. college or university.
An institution considering a multinational university will confront problems that are beyond its normal experience. Each of the following areas is problematic for a new multinational in a new country: exchange rates, language, local governmental regulations, customs, information technology, communication systems, banks, and transportation. Exchange rates can have a significant impact as funds are brought back into the home country and as they are recorded on financial records. If the dollar increases in value, exchange rates could wipe out the financial rationale for the program. Language problems will occur between students, faculty, administrators, and even government regulators. The TOFL examination [Test of English as a Foreign Language] can often turn into a breakpoint in recruiting a financially viable set of students. Of course, this assumes that the business and academic programs of the college are conducted in English. Because most Americans are deficient in foreign language skills, the problems of communicating with local officials can be difficult. Local governmental regulations may involve unexpected costs or regulatory quagmires. This can delay projects or force dangerous and unethical bargaining.
Different customs can pose a challenge for project leaders. Information technology and support in technologically advanced countries may not be a problem, but in some countries transmission speeds may be slow. Local banking customs can be a concern in some countries. It is not unusual to find that money is delivered in a bag on the back of a motorbike. Sometimes exorbitant fees are charged to cover processing fees. Last but not least, transportation may prove unsafe and/or expensive in some parts of the world.
Even though a market is huge or looks like a promising opportunity, it does not mean that success necessarily follows from the establishment of in-country sites. Take the experience of one Australian university in Asia. They closed their sites after finding that even though the potential seemed vast, in reality less than half their expected enrollments materialized. Several quickly closed their doors. These issues suggest that the success of an international strategy depends on strong planning and due diligence.
Financial structure. The financial model of multinational programs is fairly straightforward. It is driven by student tuition payments that should cover all associated expenses and allocations. The big issues are accurate forecasts of enrollment, correct estimates for expenses, currency exchange rates, pricing, debt, and regulations. Pricing decisions must balance price parity with the U.S. campus and the financial capacity of students in another country to pay the high price charged by U.S. institutions. If the price is at parity to keep foreign students at the U.S. campus from staying home and taking the education at a significantly lower price, tuition may price itself out of the overseas market. Typically, foreign students come to the United States in hopes of finding high-paying positions. Price differences may not be relevant. This is not always a valid assumption in countries such as India, where the income for technical professionals is growing fast enough to compete with U.S. pay scales.
If a comparable scenario governs tuition pricing, then financial aid may play a significant role in pushing prices into an affordable range for local students. This scenario does not apply when a significant price differential may not cause problems with students enrolling at the U.S. campus. However, financial aid may be given as a matter of courtesy so that the national or state government can declare a benefit for allowing the U.S. institution to open its doors. Debt will probably have to be financed through the home funds of the home university, although local financial institutions with government support may provide some assistance subject to the granting of a service gratuity paid through financial aid for students. Governmental regulations in the form of customs laws and transfer of funds back home may have an impact on the speed of starting the program and the repatriation of cash.
Because of the complexity of running a program overseas, Hal Irwin and Robert Thompson, in an excellent article on multinational programs, suggest that institutions should expect that the parent institution must properly capitalize the venture and expect that several years will be needed to reach breakeven. [See the full article, “Making It as a Multinational University,” in the July-August 2008 issue of Business Officer.] The institution needs to prepare itself to provide substantial financial support during this period and may decide that the program needs to be canceled if it is not at breakeven after a particular date.
Comments about the multinational model. Leaders need to think through exactly what the college expects to do, how it will be done, what obstacles will be encountered, what the benefits and costs are, and what information is needed to prepare a due diligence report effectively. Some private institutions conceive that establishing a foreign campus is similar to finding the lost city of gold sought by the Spanish conquistadors.