The Business of Universities

cross-posted at Dagblog

A lot of people who talk about reforming American universities like to say that they should be "run like a business." Those people seldom explain what they mean by that, because they take their "like a business" phrase as self-evident and self-explanatory. But American universities, even if they're non-profits, already run like businesses. In fact, they are businesses. The only question is what kind of businesses they should be.

(Part of people mean when they say schools should be run like businesses, of course, is that they should be run by a businessman: by a CEO much like the CEOs who run large corporations, with a free hand to use the top-down management techniques seen in Fortune 500 companies. That's a subject for another post, but at least a few universities have already tried their luck with a CEO-style President.)

But if we're seriously going to imagine the enterprise of the university as a business, the key question is what university's product is. Most people who talk about "running universities like a business" generally imagine that the core business is selling classes to the students. That makes a kind of easy, first-glance sense: the students pay tuition, so they must be the customers, and they thing they pay for, the classes and credit hours and diplomas, must be the product. In this model, there's no fundamental difference between selling courses to undergraduates and selling slices of pizza at the mall. You give the customers what they want. When you're selling pizza that means cutting your price and throwing on a little extra pepperoni.

But in a complicated business model, the most obvious place where money changes hands isn't always the heart of the actual business, and it's a rookie mistake to make that presumption. For example, thinking of newspapers as in the business of selling readers the actual copies of the paper is a mistake; the core business of the newspaper is selling advertising, not newspapers per se, and the price of a copy is only a way to recoup the distribution costs. In the same way, tuition at non-profit universities merely offsets the costs of operations. In fact, almost every university (without counting the newer for-profit schools) runs a loss on tuition. Even when a student is paying full price, that full tuition doesn't actually cover the expenses of teaching the student for a year. Maybe that's a sign of inefficient, unbusinesslike practices that require a CEO to whip things into shape. But more likely it's a sign of a different business model entirely. The wealthiest and most successful universities actually take a bigger loss on tuition than other schools, because they can afford to, and because doing so furthers their long-term goals.

The actual product of university teaching is alumni. (The university has another product, research results, but I want to keep the focus on teaching for this post.) The goal of a university, properly understood, is to produce as many educated and successful people as it can. The wealthy private schools, such as the Ivies, spend more money on their undergraduates, give out more financial aid, and keep their sticker price pretty much the same as any other private college's; the top price at Harvard or Princeton is the same as the top price at a less famous place. So Princeton, to take an example, collects less in overall tuition money than a second-tier private university does, but spends much more. Yet it keeps growing richer than its less famous rivals. Princeton's core business is alumni development; the school lives off the gratitude of its successful former students. And the more generous those grateful alumni are, the more Princeton can afford to invest in its current students, in order to maximize their later success. That is a business model, and judging by the last century or two a quite viable one. Public universities also succeed when their alumni donate to them, but the chief source of extra revenue there is funding by state governments. The current rhetoric about free markets makes any government spending look suspect, but funding state universities is a deeply rational economic decision. In effect, the state legislatures are buying in-state alumni, subsidizing tuition in order to have a better-educated and better-paid corps of adult taxpayers in the future. The question of how much to spend on, say, the University of California could be rendered, economically, as the question of how much to spend to increase California's tax base.

The difference between selling classes and producing alumni is enormous, and affects the educational strategy on every level. If you're selling classes by the slice, you keep the costs as low as you can. If you're producing alumni, you keep the quality as high as you can, even if it means taking short-term losses. If you're selling classes, you're focused on providing the customers what they want before they take the class. If you're producing alumni, you're focused on creating long-term satisfaction and long-term success. If you're selling classes, the students only have to be happy when it's time to enroll for next semester, but if you're producing alumni, they have to be happy with the education they got twenty years later. If you're selling classes, the impulse is to sell, and indeed too often to oversell, the benefits of the classes. If you're producing alumni, there is sometimes even an incentive to block students from a career path they might not be suited to; the pre-med courses at Princeton aren't designed to maximize customer satisfaction. They're in fact designed to redirect young people who think they want to be doctors, but who don't seem to have the skills or the motivation to become very successful as physicians, into some other field where they are more likely to thrive. (Princeton would rather have an alumnus become a leading art historian than a pediatrician with lots of malpractice suits; and while it allows its students to make that decision on their own, it lets them face the reality of the professional demands.) Now, that would make for very poor advertising copy ("Princeton: Where We Disabuse You of Your Less Realistic Dreams") but it's ultimately more interested in the student's success than other models of education are.

Universities are in business, right now. Their business is their students' eventual fulfillment and success. When you hear university administrators talking about building up a school's "brand," remember that universities were building their brands, through the quality of their alumni, before business types ever stumbled across the concept. You can try to build a school's brand the way you would for sneakers, or pizzas, or car stereos, with fancy logos and advertising, but at the end of the day a school's real brand is the reputation it gets from the quality of its alumni. If your old students are impressive, people will be impressed with your school; if your old students aren't, people won't be. A university's prosperity is inevitably and rightly linked to that of its former students. And in the end, a school doesn't deserve to be rewarded for anything else.