Published on 2016/06/16

Acquisitions, Mergers and Reinvention (Not Closures) Will Characterize Higher Ed’s Future

The EvoLLLution | Acquisitions, Mergers and Reinvention (Not Closures) Will Characterize Higher Ed’s Future
Though it’s unlikely that the higher education market will see a rash of closures over the next decade, institutions hoping to remain independently viable must actively pursue fundamental changes to help them stay relevant.

“The report of my death was an exaggeration.” Mark Twain’s words are ringing loudly for higher education leaders having to fend off predictions of impending mass closures, most notably made by disruption pioneer Clayton Christensen. However, institutions may not be as in the clear as they would like to believe. In this interview, Kenneth Hartman shares his thoughts on the fundamental changes institutions need to make to adapt to the shifting realities of today’s postsecondary marketplace.

The EvoLLLution (Evo): Has higher education seen a true disruptive innovation?

Kenneth Hartman (KH): No, higher education has not seen a true disruptive innovation, but we are seeing what I believe is the canary in higher education’s coal mines. We’re starting to see disruptors like bootcamps, which are reflective of the market’s interest in unbundling the current degree programs that many colleges and universities are offering.

The market forces combined with this populist movement to change higher education—which is coming from both donkeys and elephants in Washington DC and across the states—promises to change higher education into something that will be very different. As of right now, with the exception of some small, private, heavily tuition-dependent institutions, I think we haven’t seen this change. It is coming and it will just require a few triggers in the economy to make it come faster than it has to date.

Evo: How likely is it that half of America’s postsecondary institutions will close by 2028?

KH: Colleges aren’t like Blockbuster Video stores. You can’t just shut them down. Economic and political forces will force unprecedented numbers of mergers and acquisitions. However, there are too many players involved in the structure and governance of colleges and universities for them to simply go away.

We’ll see a handful of institutions close in the next few years, but I think we’re more likely to see stronger institutions acquiring the weaker ones. We’re going to see increased partnerships between the for-profits and some non-profits. We’re going to see a lot more joint ventures between non-profit schools and private investors to try and provide the working capital institutions need to offer a better product at a lower cost.

We’re going to see a lot of different alternative options popping up at alternative prices with alternative delivery mechanisms offering alternative credentials in the future. I don’t think a lot of institutions will be shutting down. There will be some that close, but it’s more likely that their assets will be acquired by other, stronger institutions.

Evo: To your mind then, is it more fair to say that half of America higher education institutions will be fundamentally transformed by 2028?

KH: If you look at the numbers objectively, you see that by 2020 the number of 18-year-olds in the U.S. will be almost a million less than in 2013. There’s no making up that gap for the vast majority of institutions that are heavily dependent on immediate high school graduates. Those are the realities.

In order for institutions to prevent themselves from falling into an economic situation that they don’t want to be in, they must begin to fundamentally change and restructure their business models. The revenue stream that they’ve been used to in the past simply is not there anymore.

What’s also different is there has been a loss of bipartisan political support for higher education. This is no longer just the conservatives or Republicans—you’re seeing this from Democrats as well. A federal bill was recently sponsored both by leading Democrats and a leading Republican to tax the endowments of some of the largest institutions in the country. Most institutions—including the ones with billion-dollar endowments that have to this day been fairly unscathed—are on an unsustainable path. They need to engage in an open and honest conversation about whether or not the models they’re currently operating on will sustain them over the next 5 to 10 years.

Evo: How important is it for senior institutional leaders to consider changes centered around adaptability and flexibility?

KH: It’s critical for institutions to consider changes that improve their adaptability and flexibility. There is a basic business truism—whether you’re running a mom-and-pop candy store or you’re running a non-profit university with a billion-dollar operating budget—that all organizations must be strong at the Three P’s: product, process and people. If you look at most institutions, with possible exception of the top 120 colleges that are heavily endowed, all three P’s are broken.

When it comes to the product, the degrees and certificates that are offered are oftentimes of little interest or of low return for prospective students.

As for the process, we need to look more closely at the idea of restructuring, adaptability and flexibility. The institutional structure is oftentimes more faculty-focused than student-focused, and that needs to change. I was visiting a college the other day that is looking to expand their adult-focused executive education program but yet they will not change the current two starts dates in the year—once in the fall, once in the spring. They want to go with their semester program structure even though adult learner populations want multiple starts. The institution has to be adaptive, they have to be flexible to capitalize on these new opportunities.

Finally, the people. The current postsecondary model that most colleges use pushes them to hire faculty full-time to teach less course hours than they’ve taught in the past. There’s been a reluctance on the part of many institutions to hire people who are not, in their opinion, “qualified” to teach because they may not have a terminal degree. Even though these people may have 40 years in business or 40 years in accounting, their lack of a terminal degree disqualifies them from teaching at the postsecondary level. A lot of that is as a result of accreditation issues, but it creates a reality that doesn’t reflect the needs of today’s learners.

In order for institutions to have sustainable offerings, they have to re-examine all three of the P’s—their people, their products and their processes.

Once institutional leaders have examined their current position and determined what model is going to be sustainable for them in 3 to 5 years, they have identified “the way”—or, “What is it that we need to do to have a good model that is sustainable and allows us to continue our traditions and programs going forward?” That’s a tough conversation for trustees, faculty and management to have.

However, even more important than identifying “the way” is the second piece of the equation: The will. This is having the will to make the necessary changes across all three of the P’s to put the college on a sustainable footing going forward. The trustees, in my opinion, hold a primarily fiduciary role and in order to fulfill their fiduciary responsibility the trustees must be asking hard but honest questions about where the institution stands in each of the three P’s.

Evo: Is there anything you’d like to add about the validity of Christensen’s claim about college closures over the next fifteen years and what institutions can do to make sure that that prediction doesn’t come true?

KH: Institutions should look at the claim based purely on financial reporting and predictions. For example, Moody’s reported in 2014 that expenses were outpacing revenues at 60 percent of all colleges they track, big or small. They also predicted that 20-30 percent of its rated colleges were likely to struggle to grow net tuition revenues from 2016.

All of the financial points look very bad, but the political reality is that these institutions have nine lives because they’re tied to jobs and jobs are tied to politics. We’ll see an increase in closures, but I don’t think we’re going to see the aggressive closures predicted by professor Christensen.

There will be a sizable increase in mergers and acquisitions. Smaller institutions that can’t make it on their own will find larger players to come in and acquire them, making them part of the larger institution. They will strip the assets, perhaps even the people, and they will do that to help healthy institutions be even healthier. Unhealthy institutions will not necessarily go away, but they will form other things.

Going back to the canary in the higher education coal mine; I was up last week visiting the graduating class of a bootcamp that was being run by Rutgers University. There were 50 adult students—some who were career changers, others who were in business—who went through a 26-week, $9600 experience. I met one chef, for example, who went through the course. These graduates were meeting with dozens of employers who saw these graduates demonstrating what they had learned in the bootcamp and I’m told that over 80 percent of them have found new gainful employment as a result of this $9600 dollar, part-time, non-credit experience.

When I talked to these people and I asked them to tell me their story, I heard time and time again that they knew their education was important, they knew the key to their career and success was in continuing education, but they didn’t want to pay for or be involved in the process of earning a master’s degree. They didn’t even want to be involved with the four- or five-credit certificate program. They wanted just-in-time learning and they wanted something that was going to have a very high return on their investment of both money and time.

These types of programs are popping up all over the country and I think the market forces tell a story. Colleges that are able to be adaptable and flexible will be the leaders in this new higher education marketplace. Adaptability, vision and flexibility are going to be critical for schools that are not heavily-endowed. If they do not have the will to do that then I think unfortunately Christensen’s prediction will probably come true. However, I’m optimistic that when the pain gets high enough, trustees of these institutions will demand that their senior leadership provide them with the way to prevent closure. If these institutions can’t muster both the will and the way, then I’m afraid that Christensen’s predictions not only will come true but, for the good of the higher education system, they will need to come true. We need to weed out the bad players and thin the herd, but that’s preventable for a lot of institutions if they act now.

This interview has been edited for length and clarity.

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Key Takeaways

  • Given the importance of higher education institutions to local employment, it’s more likely that we’ll see mergers and acquisitions of unhealthy institutions rather than outright closures.
  • Institutions need to address their processes, people and products in order to ensure they’re responsive to the demands of today’s market.
  • Bootcamps are a perfect example of the increased interest from the market for an unbundled postsecondary product—institutions must respond to this interest before it’s too late.