GLOBAL: Private sector capitalises on complacency

Most of the post-secondary academic community-industry appears to ignore fundamental economic realities. Except for the elite institutions at the top of the league tables, the vast majority must compete in the market for students. Each institution's student enrolment, directly or in varying indirect degrees, provides the requisite revenue to cover current and projected costs.

Faculty and staff must be paid, equipment and services purchased and debt retired. All colleges and universities must have a sufficient income stream to survive, if not flourish. Increased enrolment brings the potential for growth, while decline foretells peril. Other things being equal, students tend to go where they are best served.

There are three major sectors in the post-secondary academic community-industry. They are public, non-profit private and for-profit private. While their mix of income streams, direct and indirect government subsidies, tuition and fees, auxiliary enterprises and philanthropy, varies among them, enrolment is the dominant source of their revenue.

With public institutions enjoying large government subsidies, they attract students with their relatively low tuition and arrays of programme alternatives and amenities. Presumably they have a competitive advantage in the student market. They can use enrolment to justify and sustain current subsidies and to forecast future demands. They aggressively augment their income with continuing pleas for philanthropy.

Without the relatively large direct government subsidies, the non-profit privates must pass more of their costs on to their students and depend upon the largesse of supporters. They tend to be sponsored by religious or special interest organisations espousing a set of core values. Hence their market appeal tends to rest with sympathetic students and supporters.

Denominational or organisational sponsors provide these institutions with at least three valuable assets: brand, niche market and, in varying degrees, access to their sponsor's treasury and donated services. Institutions attracting more students tend to enjoy greater support.

Both the public and non-profit sectors, aside from recessions in their national economies, appear to have relatively stable income streams. I suggest this security has brought a sense of complacency fostered by their limited exposure to risk and is a primary factor that differentiates each of the three sectors.

The public universities, while they must compete with common education, healthcare, infrastructure and prisons within their host governmental bureaucratic labyrinth, have the good faith and credit of their governmental sponsors. Governments may reduce subsidies, as is seen in the continuing great recession of 2008, but few institutions have been allowed to close for failing to balance their books.

Public colleges' and universities' exposure to risk is relatively low compared to the other two sectors. They may carry, at worst, a limited tax burden. They are further sustained by their pursuit of supplemental government funding or philanthropic largesse to support their endless portfolio of 'do good' projects. Once chartered, public universities take on a near eternal destiny.

The private non-profits typically carry a limited tax burden. While lacking a large direct pipeline to the public treasury, they have indirect access through the grants and loans available to their students that some governments provide. They balance their bottom lines with the pursuit of philanthropy or supplemental government largesse to support 'do good' projects.

A few financially fragile, mostly very small institutions, lacking a distinctive brand and strong sponsor backing, close their doors each year. In aggregate, they carry greater risk than the public universities, but far less than the for-profits.

The for-profits carry the heaviest financial risk burden. Sponsorship rests with their owners or stakeholders, who have provided the enabling capital, with a legitimate expectation of a return on their investment. Their expectation is constrained; no return will be realised until the operating and capital costs, including taxes, are paid.

In the US if they are organised as a corporation, double taxation is an additional burden. To grow they cannot rely on governmental or philanthropic gifts to develop new programmes and services. They must earn a surplus or borrow the funds with interest rather than seeking gifts.

With their revenue largely limited to tuition, the for-profits follow a disruptive business plan. When one fails to attract a sufficient number of students, its owners or stakeholders lose their investment. With that disincentive, they tend to be professionally managed. They tailor their programming to meet market demand rather than trying to cover the depth and breadth of the academic disciplines, and do not provide amenities.

A post-secondary diploma provides the path to economic and social advancement. The for-profits recognise that there is a symbiotic relationship between prospective employers and potential students.

Employers favour applicants who meet their job-ready specifications. Prospective adults and a modest number of recent high school graduates are attracted to post-secondary institutions that quickly lead to employment. Their curricula are tailored to employer needs without the multitude of frills found in the two other sectors.

Programmes are offered at times and locations convenient to students. For-profits keep their operating cost relatively low. Faculty are employed to teach and not to publish or participate in managing the enterprise. Thus faculty have more time to deliver instruction.

Most of their students have jobs and families and neither have the desire or time for the amenities and diversions that public and non-profit institutions employ to attract students. Their physical incarnation is limited to simple classrooms, library, lounges and administrative offices.

Often located in rental space, they do not have capital nor the operating burden of multiple buildings and landscape. While their prices are high, they offer convenient programmes tailored to lead to employment.

For-profit enrolment revenue has been growing in many countries. I suggest that their disruptive business plan is based upon the following factors.

They recognise underserved market segments willing to pay a premium to secure the education-credential needed for career advancement. They recognise employer needs and link them to student demand with responsive programming. To assure a return for their owners while minimising risk, they have limited their programmes to pathways to employment. Finally, their Spartan operating and capital expenditures has promoted a spread between revenue and cost to generate a return to their investment in return for the added risk.

While the competing sectors may recognise the demand they meet, many governments do not have the resources to supply the seats necessary. Doctrinal as well as limited resources prevent the non-profit from supplying seats to meet the demand. Thus the door is open for-profits enterprises with a tolerance for some risk to respond to need.

* William Patrick Leonard is vice-dean of SolBridge International School of Business in Daejeon, South Korea.