1. freeze new hiring, give smaller increases in salaries and impose unpaid furloughs[3]
2. charge higher tuition prices
3. ask for more state and federal funding
4. delay renovations, maintenance; reduce discretionary spending, like travel
5. reduce wage increases, freeze salaries

 But budgetary nibbles and price increases don’t add up to a strategy and for good reason.  Most academic leaders never built a company or made payroll with their own money.  They never pruned a product line, restructured a factory or built a marketing campaign.  To the contrary, they have grown fat on a steady diet of tuition increases and unbridled growth in administrative overhead.  In fact, from 2002 and 2006, the average tuition at the typical public university rose over $1,400, or 27 percent, while spending on each student only went up by 1 percent, or $149.  This begs a bailout-esque question, “Where did all that money go?”  A retrospective analysis by the Delta Project on Postsecondary Education Costs, Productivity, and Accountability[4] shows a whopping 44% of all academic spending goes to administrative support (i.e., the bureaucrats) and a falling share to faculty salaries and student instruction.  Imagine stockholder’s reaction to a company whose overhead cost rose 27% with zero sales growth.

While most universities pulled down the shades hoping Dottie would pass by, University of Wisconsin and Ohio State challenged convention.  Wisconsin Chancellor Carolyn Martin held four forums on campus with students, faculty and staff (click for audio) to gather ideas for innovation and efficiency given impending budget cuts.  She says, “The boldest ideas came from students.”  Ohio State President Gordon Gee gave a speech on February 9 challenging faculty and staff to “reconfigure ourselves” and reorganize traditional academic into “interdisciplinary clusters.”  He also kept tuition levels constant the past two years (click for speech) and hired a businesswoman with 30 years experience in health care (no Ph.D. degree – gasp!) to run the University’s business school. 

 Those are good initial steps and it’s gratifying to see leaders of our best universities make change happen rather than just talk a good game.  But the fact remains these steps represent minor tweaks to a sputtering business model.

 On one hand, I’m sympathetic to higher education’s plight and, frankly, ticked off.  The American system of higher education is a national competitive advantage we should not fritter away during an economic downturn.  If I had my way, I’d redirect funds that Congress budgeted for Harry Reid’s $8 billion Maglev train and Nancy Pelosi’s $30 million mouse protection program to research labs at great schools like Caltech, MIT and Johns Hopkins where new technologies are invented that benefit generations of Americans at all levels of society.

But on the other hand, there’s no free lunch in a recession and everyone should get a haircut.  Given the State of Illinois’ $11 billion deficit and a $53 billion FY2010 budget (give or take a $billion here or there), should Illinois higher education be untouchable?  The state’s budget shows higher education spending flat over FY2009 but up 10% since FY2008 (excluding contributions to retirement).  That’s $3 billion in taxpayer subsidy for starters, not including tuition payments from mom and dad or contributions from non-parental donors.  Based on data from Governor Quinn’s FY2010 Budget[5] and enrollments numbers from the Illinois Board of Higher Education[6], here’s what our public universities get from Illinois taxpayers:[7]

 

 So, as a bailout-fatigued parent of 2 college students who still believes “billion” is a large number, I’m going to ask the hard question:  Could Illinois taxpayers and parents get better results on the state’s nearly $3 billion higher education investment if a tough-as-nails product manager ran our state’s portfolio of universities and community colleges?

 There are two iron-clad laws of product management I’ve experienced first hand.  One law, which econmists call the “experience curve,” goes like this:

 Unit production costs decrease for each doubling of volume, assuming design and complexity are constant

 The second law links complexity to business performance:

 Complexity and scale are inversely related with cost and quality

 Simply stated, 1) “the more you produce, the less it costs” and 2) performance deteriorates as variety goes up.  If you think terms like “experience curve” and “complexity” are ivory tower nonsense, read the book, “The Machine That Changed the World,” or visit a Pontiac dealership.

 Arizona State University is one education factory that makes my point. 

 Since 2002, ASU increased the number of academic programs from 273 to 331, established 16 new schools and launched 44 new academic centers and institutes.  Growth is exciting when cash is flowing, but given the vice grip of our current economic downtourn, unwinding that growth can be hard and painful.  Like General Motors, ASU must decide which programs to keep and which programs to drop. 

 Beyond budgetary tweaking, what can a university do to get its costs in line with shrinking revenues?  The problem for institutions of higher learning is that “costs walk.”  At University of Illinois’ Champaign campus, Chancellor Richard Herman recently told a gathering of students and staff, “(T)he reality is that our assets are people and 80 percent of our expenditures go to salaries.”  At ASU, the Chancellor implemented a furlough program mandating 10-15 days off without pay for faculty, staff and administrators, basically equal to a 5-7% haircut. 

But is spreading the pain evenly through budgetary tweaking like furloughs and pay freezes across everyone’s paycheck a smart haircut? 

Ultimately, leadership is about strategy, resource allocation and results.  Even though their organizations and products are different, higher education should take a lesson from business before politicians step in and do it for them.  How?  Two simple performance metrics from product management — product profitability and yield — can help higher education manage smarter.

1. Product Profitability. Imagine for a moment that all the colleges at University of Illinois were brands, its programs were products and courses were components. Some colleges have strong brands and a loyal following, like the College of Engineering and its 7,600 students. Its Department of Computer Science provides tremendous value through tuition, federal research grants and alumni donations. In contrast, the College of Liberal Arts and Sciences (LAS) provides comparatively less brand value but educates more than 15,000 students. LAS’ Department of Slavic and Baltic Languages and Literatures, while well-respected, provides considerably less value to the University than Computer Science. I’m not picking on Slavic Languages at all; rather, it is representative of several boutique departments that make up the complex fabric of the university.

A product manager would calculate the profitability of each course taught in each department within each college of the university, allocate revenues from outside sources (i.e., donations, gifts, research grants), and subtract costs directly caused by that department’s faculty, staff and direct costs.  Once this database is organized, results can be viewed at a course, department, program, or college level.  Since the majority of costs walk, analysis of contribution margin is quick and straightforward. 

However, a product portfolio manager would take a broader perspective and look at all courses taught in all departments across all universities in the State of Illinois.  Why?  To align resources in a way that 1) satisfies student demand, 2) educates students profitably and 3) provides a stimulating and sustainable environment for scholars to flourish in their chosen fields.  Quick note to my academic friends:  this is a mixed-integer mathematical optimization problem that models virtually an unlimited number of alternatives, including constraints for academic excellence.

How, specifically?  Let’s start with Slavic and Baltic Language departments as an example.

If there are 8 Slavic and Baltic Language departments across Illinois’ public universities but demand for only 25% of capacity, is it prudent for Illinois taxpayers to foot the bill for 75% excess capacity?  Probably not.  Is it wise to get rid of all 8 departments due to low demand?  Of course not.

So, what steps could any single department undertake to improve its profitability or minimize its loss?  With only a local perspective, each department would insist on keeping enough faculty and staff to sustain academic excellence and enough courses to be attractive to students.  With a wider lens, however, one might argue that merging 8 departments into 3 bigger departments and allocating them strategically based on demand and geography would make more sense.  Students interested in Slavic languages could still choose 1 of 3 schools to attend, academic excellence would likely improve as more scholars collaborate together, and selective reductions that balance capacity with demand would yield the cost reductions which Dottie and state budgets demand.  Moreover, the University with the best Slavic and Baltic Language department could expand its product footprint by franchising instruction to other Illinois universities that can’t afford the fixed costs of a boutique department through in-residence, electronic or blended delivery models.

On the other hand, product managers don’t just downsize.  They also expand capacity to steal share from competitors with killer products.  Let’s use the Department of Computer Science at University of Illinois’ College of Engineering (ranked 4^th nationally) as an example.

At a micro level, the capacity of the Department of Computer Science is constrained by classroom space, faculty and its budget.  Despite its strong ranking, enrollments held steady between 590-625 students for the past 3 years.  As a consequence, hundreds of highly qualified Illinois students were forced to attend out of state schools like Michigan, Purdue and Georgia Tech where they pay two or three times more for tuition than at University of Illinois.  And hundreds of out-of-state students who are willing to pay tuition premiums at Illinois could not attend.  These “leakage” and “stock-out” problems represents more than lost revenue for the College of Engineering and University of Illinois.  When markets don’t clear, inefficiency brings a cost.  In this case, the State of Illinois is deprived of scarce human capital that creates new technologies and builds new businesses, and Illinois taxpayers subsidize higher education more than they should.

To be clear, I am not advocating elimination or expansion of any particular department or college.  The point is to find a sustainable operating structure across the state’s publicly funded higher education system where budget reality and scholarship coexist at the appropriate scale based on market demand and financial constraints. 

If an institutional haircut is inevitable, data from product profitability analysis can be the difference between a smart trim and a buzz cut.

•2.      Yield.  At an automotive assembly plant, the concept of yield is a well-known metric.  In oversimplified form, yield is: 

The percentage of total cars manufactured that passed final inspection able to be sold

In higher education, yield means “graduation rate:” the percentage of students who enroll and graduate on time.  What most people don’t know, and higher education doesn’t discuss, is that graduation rates are remarkably low.  For example, in the California State University system, graduation rates are about 16% after 4 years 48% after six years.  In Illinois, graduation rates vary widely across public and private institutions (click for fact source).  In fact, out of 240,000 students who begin college this year in Illinois, only 56% of them will graduate in 6 years and many schools are shockingly bad:

 

 

* private school

 

Welcome to the soft underbelly of public higher education.  If universities were manufacturing plants, warning lights would flash, the line would STOP and problem-solving teams would swing into action.  But in higher education, lights don’t flash and heads don’t roll when 50% of students fail to graduate in 6 years because universities get paid no matter what. 

What other industry could survive with a 50% failure rate?

As disturbing as these four- and six-year graduation rates are to most people, they are lagging indicators and don’t explain “why” or “how” to fix the problem.  A product manager would look for underlying cause-and-effect relationships or unusual patterns in the data that signal opportunities for improvement.  For example, while Chicago State University only graduates 3% of its students after 4 years, its problems begin early: 43% of Chicago State freshman students drop out every year (click here).  At University of Wisconsin, progressive Chancellor Carolyn Martin identified specific faculty shortages that prevented scores of students from enrolling in an introductory organic chemistry class.  Given the sequencing of prerequisites for certain majors at Wisconsin, students were forced to choose between another course and another year in Madison.

While such numbers are disturbing, the situation is even worse for one segment of students – military veterans.  Data from DoD and the US Department of Education reveal that veterans are “6 times” less likely to graduate at all post-secondary schools than non-veterans and “3 ½ times” less likely to graduate than non-veterans.  Ironically, according to the US Department of Veteran Affairs, veterans’ expectations for earning a degree are higher than traditional students’ expectations upon matriculation. 

Dottie is on a collision course with higher education and it’s too late to pull down the shades.  There is still time for Springfield and higher education to collaborate on a smarter haircut, but budgetary tweaking isn’t enough.  Without a different approach, I see Bailout 3.0 right around the corner.