Higher Education Is Now Ground Zero For Disruption
By Todd Hixon
Why? US Higher Ed has a product that does not work, ridiculous costs, and an antiquated business model. For many years we accepted this because we see extraordinary value in education. Now, most middle and upper-middle class parents find they cannot give their children the education they enjoyed. Technology has recently put a spark to this fuel: on-line education works and dramatically improves costs and access. This is a big opportunity for entrepreneurs and investors. Many new companies and programs will emerge in 2014.
The view from ground zero. (Photo credit: wikipedia)
The Product Does Not Work. A college(1) degree provides multiple sources of value, but the one that motivates parents and government to dig deep for tuition is the belief that college is the ticket to upper-middle-class life. ROI calculations show a range of results (e.g.), with grads of top technical schools showing strong ROIs and those less-known liberal arts schools often doing poorly. However, results for many recent graduates are awful: one in eight recent college graduates is unemployed, and half of those employed hold jobs that do not require a college degree (more).
Employment success of graduates has not been a top priority for Higher Ed. This reflects the complex mission of colleges and universities: research/scholarship and intellectual development are key goals in addition to imparting career skills. Plus, many believe that affiliation with a great educational institution by itself creates career opportunity. This clearly works for the top 50–100 schools. Many schools below the top 100 have tried to climb the pyramid by spending more and raising fees; it’s doubtful that this will pay off for the school or its students. The Economist studied this dynamic among graduate business schools. It found that “an MBA from a mid-ranking school is no longer the investment it once was [a chart shows that costs for these programs have risen sharply but salaries for graduates have remained flat] … In comparison, the schools at the ends of the spectrum look more appealing. Lower-level programmes … are much cheaper to attend [and] elite business schools still look like a fair deal.” (more).
Plus, businesses are no longer willing to invest in training recent graduates: management training programs are disappearing. Clients of law firms often refuse to pay for first-year lawyers, arguing that they add no value. Unpaid internships for recent graduates have multiplied in place of paid training programs, indicating that businesses find recent graduates unprepared for productive work.
Price Indices for U.S. Higher Ed, Medical Expenditure, and Consumer Prices. Source: NAV Analysis.
The Cost of Higher Education Is Ridiculous. The cost of college has increased over 3x in real dollars (adjusted for general inflation) over the last 35 years, but we have not seen a comparable improvement in value. Amenities are much nicer and schools do more to nurture students, but I see no evidence that the education is better or more marketable.
When I was a college senior in the ’70s I heard William Bowen, then provost and later president of Princeton University, lecture on the cost of a university education. His main point: there is no productivity gain in a university(2), so we should expect costs to outpace inflation by roughly the rate of productivity increase in the economy: 1%-2%/year(3).
In fact it has been much worse: universities make hospitals, doctors, and pharma execs look like amateurs when it comes to putting prices up. The cost of Higher Ed in the U.S. rose almost 10x in dollars of the day (7.8%/year) in the 30 years following Bowen’s lecture. In comparison, U.S. medical costs rose 6x (6.1%/year) and U.S. consumer prices grew 3.3x (2.1%/year — see chart above). And, universities operate a highly sophisticated and aggressive price discrimination scheme: they set a very high list price, require each customer to provide complete income and wealth data (the “financial aid form”), and use that information to offer a discount (the “financial aid package”) calculated to extract the largest percentage of list price that each customer can possibly pay: 100% for foreigners and “1 per-centers”, and nearly zero for students from poor families attending rich universities. When I was a business consultant I often pointed to this as the ultimate in smart, aggressive pricing.
We’re now at the point where many parents between median income and the top 10%(4), who probably enjoyed a quality college education, cannot afford to provide a similar education for their children, and if they do, it will leave them in their 50s with no savings for retirement. I suspect we all see lots of examples of this. How did we get here? The high value that our society places on education and abundant, government-subsidized financing appear to have driven steady demand despite soaring prices [similar to the housing bubble].
But, we are now at a point where the economic stakes are so high that they will drive change. Parents will find new ways to educate their children and enable them to achieve professional success. Colleges and universities with high fees and middling reputations will face declining enrollment. A technology-enabled revolution in the Higher Ed business model will help.
The Business Model of Higher Ed Is Antiquated. This deserves an essay in itself. Suffice to say, however, that the following aspects of the traditional Higher Ed business model look highly questionable in today’s light:
- A residential, facilities-based approach that drives high fixed costs and requires students to reside away from home and job opportunities.
- Parallel development of standard curriculum (e.g., Economics 101) by 2,000 different U.S. colleges/universities.
- Teaching standard lecture courses live on 2,000 campuses.
- Relatively equal allocation of key resources (staff and student loans) to studies that lead to degrees that are in-demand in the economy, and those that are not. Fewer than 10% of U.S. bachelor level graduates are in the highly demanded science, technology, engineering, and mathematics fields.
- Cross-subsidization among teaching employment skills, liberal arts education, research, scholarship, and operating a vast country club. Who really needs and will pay for what?
- Focus on the university degree as the credential, versus specific courses and skills accomplished.
- Little investment in the career success of graduates. This is not rocket science. University graduates lack basic skills like making presentations, using spreadsheets, business writing, and understanding what it means to be an employee of a business.
Add the recognition that on-line education works, and one can see many opportunities to dramatically change the business model in ways that will strongly promote greater career success, and dramatically lower costs.
So, the battle is well joined to reshape the half-trillion dollar U.S. Higher Ed market. Technology and entrepreneurs will play a big roll bringing new models and products to market. Employers can drive change by looking past traditional norms to discern what they truly need and want (e.g., an EE degree from a second tier school or high scores in 6 key EE courses taught on-line by top professors from MIT and Stanford?). And most of us can’t wait, because the $1 million bill to put the kids through college is coming soon.
- I am referring to bachelor-level degrees unless otherwise specified, and using the words “college” and “university” to mean the same thing.
- It’s dangerous to conclude that “there can be no productivity increase in our industry”. History teaches that productivity increase usually does happen, driven by innovation, especially in information businesses such as education. When it happens it is likely to be disruptive for institutions that believe it will not happen.
- Source: Congressional Budget Office, https://www.cbo.gov/sites/default/files/cbofiles/attachments/44002_TFP_Growth_03-18-2013.pdf.
- Family income of $55,000 and $150,000 respectively in 2011 (source: Wikipedia).
[This post first appeared at blogs.forbes.com/toddhixon on January 6, 2014.]