Evolving Higher Education Business Models Leading with Data to Deliver Results Louis Soares, Patricia Steele, and Lindsay Wayt American Council on Education Founded in 1918, ACE is the major coordinating body for all the nation’s higher education institutions, representing more than 1,600 college and university presidents and related associations. It provides leadership on key higher education issues and influences public policy through advocacy. For more information, please visit www.acenet.edu or follow ACE on Twitter @ACEducation. Center for Policy Research and Strategy The American Council on Education’s Center for Policy Research and Strategy (CPRS) pursues thought leader- ship at the intersection of public policy and institutional strategy. CPRS provides senior postsecondary leaders and public policymakers with an evidence base to responsibly promote emergent practices in higher education with an emphasis on long-term and systemic solutions for an evolving higher education landscape and changing American demographic. TIAA Institute The TIAA Institute helps advance the ways individuals and institutions plan for financial security and organiza- tional effectiveness. The Institute conducts in-depth research, provides access to a network of thought leaders, and enables those it serves to anticipate trends, plan future strategies, and maximize opportunities for success. The Institute’s higher education program focuses on leadership and higher education workforce trends and issues. Its financial security program addresses key questions in three thematic areas: lifetime income and retire- ment security; retirement plan design; and financial literacy and capability. To learn more about the TIAA Institute’s research and initiatives for higher education leaders, please visit its website at www.tiaainstitute.org. ACE and the American Council on Education are registered marks of the American Council on Education and may not be used or reproduced without the express written permission of ACE. American Council on Education One Dupont Circle NW Washington, DC 20036 © 2016. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, with- out permission in writing from the publisher. Evolving Higher Education Business Models: Leading with Data to Deliver Results Louis Soares Vice President Center for Policy Research and Strategy American Council on Education Patricia Steele Principal Consultant Higher Ed Insight Lindsay Wayt Graduate Research Associate Center for Policy Research and Strategy American Council on Education This report is the product of a roundtable jointly convened by ACE and the TIAA Institute in September 2015 and related background papers. The initiative was funded by the TIAA Institute. Suggested Citation: Soares, Louis, Patricia Steele, and Lindsay Wayt. 2016. Evolving Higher Education Business Models: Leading with Data to Deliver Results. Washington, DC: American Council on Education. CONTENTS Forward .................................................................................................................................................................................................i Executive Summary ...................................................................................................................................................................iii Introduction .......................................................................................................................................................................................1 ACE/TIAA Institute September 2015 Convening and Other Sources of Inspiration .................3 Background .......................................................................................................................................................................................5 The Demand for More ..........................................................................................................................................................5 Shrinking Revenues ...............................................................................................................................................................6 Rising Prices and Where They Lead ...........................................................................................................................8 Innovation Is Underway ......................................................................................................................................................9 Business Model Basics.............................................................................................................................................................14 Illuminating the “Black Box” of College Spending ................................................................................................17 The Challenges and Needs for Financial Transparency ..............................................................................18 The Need for Understanding Activity Costs ......................................................................................................21 Network Leaders Needed: Unlocking the Value of Financial Transparency .........................................25 Networked Leadership and Organizations ..........................................................................................................27 Rationale for a Networked Approach ...................................................................................................................... 28 Empowering the Front Line and Moving Toward a Culture of Evidence ......................................... 32 Conclusion ..................................................................................................................................................................................... 35 References ........................................................................................................................................................................................37 Appendix A: ACE and TIAA Institute Convening ................................................................................................41 Appendix B: What Do Higher Education Leaders Need to Know About Institutional Finance? And What Can Available Data Tell Them? .......................................................................................... 44 Appendix C: Financial Data at the Crossroads of Cost Containment and Educational Innovation ........................................................................................................................................................................................55 Appendix D: Key Challenges in Higher Education: An Economic Models Perspective ...................61 Evolving Higher Education Business Models FOREW0RD Anyone concerned about how colleges and universities can remain viable, and indeed thrive, in the face of today’s many challenges should read this paper carefully. The ideas are profound and the recommendations are potential game-changers that challenge the conventional wisdom. They will help institutions transform themselves—in ways appropri- ate to twenty-first-century values, market conditions, and technology—to become better and more innovative. The authors call for rethinking the university’s “business model.” The idea is not to become like a business, but rather to analyze how processes, technologies, and resources are used to deliver value. The model begins with the institution’s “value propositions”: in particular, meeting the needs of traditional and post-traditional students. (Research and scholarship also are important, for their own sake as well as contributing to education.) Next come resources: the mix of people, technology, products, partners, facilities, and equipment necessary to meet student needs. Processes use resources in particular ways to deliver on the value proposition, and the so-called “profit formula” considers the revenue needed to cover the cost of delivering services and maintaining sustainability. The tradi- tional business model remains fit for purpose in many ways, but the current challenges have revealed significant flaws. My own work (Massy 2016) examines these flaws in detail, and proposes some practical solutions. This paper addresses similar issues as it considers the business model, the cost of teaching, and the need for “networked leadership.” “Illuminating the ‘Black Box’ of College Spending” may be the paper’s most advanced and provocative section. Institutions cannot innovate effectively without knowledge of costs in relation to revenue: both historically, in terms of what they have actually done, and prospectively in terms of what they might do in the future. This is particularly important for the cost of teaching, the “business of the business.” The required data go far beyond what can be gleaned from financial statements or even from conventional cost accounting. What’s needed are structural models that describe how resources are applied to particular activities in sufficient detail to allow in-depth understanding of what’s being done at what cost, and “what-if analysis” of what might be done to effect improvements. The needed results can be obtained from a new generation of activity based costing (ABC) models, applied at the level of individual courses, which provide bottom-up infor- — i — Evolving