How would a product manager fix higher education?
By Robert van der Hooning and Ben Bradley
The recession has taken aim at higher education. It’s too late to hide, the carnage is everywhere.
Even Harvard feels the pain. It offered buyouts to 1,600 employees after suffering an $8 billion endowment loss. In California, the situation is ugly – a $97 million cut for FY09 at Cal State University and another $66 million reduction in FY10 resulting in a $283 million operating hole.
Illinois spends about $3 billion a year on higher education, not including capital investment and tuition. Not enough, according to university leaders. What’s their response? Freeze hiring, increase tuition prices and beg for Federal funding. That’s activity without a purpose and certainly not a strategy.
This begs a bailout-esque question, “Where did all that money go?” One analysis [1] shows a whopping 44% of all academic spending goes to administrative support and a falling share to faculty salaries and student instruction. Higher education has grown fat on a steady diet of tuition increases and unbridled growth in administrative overhead.
Imagine stockholder’s reaction to a company whose overhead costs rose double digits on zero sales growth.
Given the Illinois’ $11 billion deficit and a $53 billion FY2010 budget (give or take a $billion here or there), should 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.
As a bailout-fatigued parent of 2 future college students, I’m going to ask the hard question: Could Illinois taxpayers get better results on our $3 billion annual higher education investment if a product manager ran our state’s portfolio of universities?
Ultimately, leadership is about strategy, resource allocation and results. Even though their organizations and products are different, higher education should take a lesson from basic product management before politicians step in and do it for them. How? Two simple performance metrics — product profitability and yield — can help higher education manage smarter.
Product Profitability. Imagine that all the colleges across the University of Illinois were brands, its programs were products and courses were components. The College of Engineering and its 7,600 students has a strong brand. 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 less value to the University than Computer Science. I’m not picking on Slavic Languages at all; just using it as an example.
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 department’s faculty, staff and other direct costs. Once this database is organized, results can be viewed at a course, department, program, or college level. This makes analysis of contribution margin is quick and straightforward.
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.
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 keeps 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 improve as more scholars collaborate together, and selective reductions that balance capacity with demand would yield the cost reductions 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.
Product managers don’t just downsize. They also expand capacity to steal share from competitors. Let’s use the Department of Computer Science at University of Illinois’ College of Engineering (ranked 4th nationally) as an example.
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 where they pay two or three times more for tuition. 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 optimize a product portfolio and find a sustainable operating structure across the state’s publicly funded 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, insight from product profitability analysis can be the difference between a smart trim and a buzz cut.
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.
[1] http://www.insidehighered.com/news/2009/01/15/delta
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment