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"Free college tuition" is rapidly becoming a rallying cry in the permanent presidential campaign which now drives all policy discussions. It is easy to understand why. Tuition and fees in both the public and private sectors of higher education have been climbing much more rapidly than inflation and family income for over four decades. Even families well up in the middle class are finding the cost of higher education increasingly prohibitive, greatly limiting educational choice and opportunity. Higher education debt has become one of the largest debt categories for individuals and families, and is negatively impacting career choices, initial home ownership, automobile purchases, etc. The heart of the American Dream- educational and economic mobility-is threatened. 

This issue of educational and economic mobility is indeed critical,and deserves to be at the center of  serious policy discussions. The problem is that free college tuition,as catchy and simple and attractive as the idea is, is not a viable solution to that problem in any proposal that I have seen.

Many objections have been raised to the goal of free tuition, but I would like to focus here on one simple objection: economic reality. The stumbling block is the conveniently ignored difference between price and cost.

Tuition is of course, the price charged to the student for the product of education. Existing proposals for free tuition do not address the cost of producing the education, other than to say that the government (state and national) will cover the cost so that students see a price of zero. But who determines the cost that the government must cover? The colleges - the same colleges that have increased tuition at roughly twice the rate of inflation over four decades. "Free tuition" simply removes the admittedly weak brake provided by push-back from students and parents outraged by these steady increases.

Thus free tuition alone is a recipe for bankrupting governments rather than parents and students. A sustainable free tuition approach will require an offsetting program of cost control of production of the education.  But what is the cost of production of the education? Higher education institutions have concealed the true cost of education for so long (for both good and bad reasons) that status quo definitions have taken on a certitude that makes them virtually unchallengeable within the academy.

I discussed some of the issues involved in calculating true educational cost in a previous post Cost allocation in the research university. We in higher education use a budgeting form called fund (sources of revenue) accounting rather than the more common cost (where spent) accounting, and as a consequence we have little or no data that helps us to understand the cost of a specific activity. The underlying difficulty is that colleges and universities typically have multiple missions, e.g. education, research, community service, business outreach. Many of these very worthwhile missions (including the very costly area of research) do not have associated revenue streams sufficient to cover costs, which must therefore be covered elsewhere in the budget. Since the education fund typically has the largest revenue  (either from tuition or state allocation), this is a great place to look for needed resources. As a consequence, over the years we have created certain fictions for public consumption regarding the importance of these other missions for the educational mission - with essentially no educational outcomes data that support these claims.  We just need a rationale the educational fund to support these other meritorious but underfunded missions. The analysis in the linked post above suggests that a very large fraction of what is publicly described as "cost of education" is in fact cost sharing for these other missions.

Thus, for "free tuition" to actually be sustainable, there would have to be major changes in relationship between educational institutions and their funders. Detailed studies would need to be carried out to determine what activities of the college actually contribute to educational outcomes, with only those being attributed to "cost of education". As a consequence, funders then would have to come to grips with the reality that some potentially very important non-educational programs are currently underfunded, and consciously prioritize and appropriately fund those programs.  In a rational world, funders would also need to have data showing that the programs they were supporting were using the most effective pedagogy for the most efficient learning, and had appropriate support services to minimize costly drop-outs, etc. All sounds unlikely to me!

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A college or university that does research ends up spending considerable resources of its own even when most of its research is “funded”. How and why is this the case, and where does the institution look to find the resources needed to cover this unfunded research cost? Undergraduate tuition seems like one likely source.

 

These internal research expenditures fall into two categories, which I will call “open” and “hidden”. As these terms may suggest, the first is a set of costs that are reported nationally by the NSF and consequently appear in numerous reports put out by the institutions themselves. On the other hand, hidden costs are well known, but seldom openly discussed even thought they contribute very significantly to the institutional cost of research .

OPEN COSTS

Funding for research in higher education comes from many sources as described in the NSF Higher Education Research and Development (HERD) Survey for 2015:

Higher Education R&D Expenditures by source (in Millions of current dollars )

 

Federal

State

Business

Nonprofit

All other

TOTAL EXTERNAL

Institutional

TOTAL RESEARCH

2010

37,475

3,852

3,198

3,740

1,048

49,313

11,940

61,253

2011

40,767

3,829

3,179

3,854

1,037

52,666

12,610

65,276

2012

40,140

3,695

3,271

4,023

968

52,097

13,633

65,730

2013

39,445

3,653

3,506

3,889

1,537

52,030

14,985

67,015

2014

37,923

3,869

3,725

3,980

1,905

51,402

15,754

67,156

4 year % change

1.20%

0.44%

16.48%

6.42%

81.77%

4.24%

31.94%

9.64%

These data include medical schools, which contribute about $23B to the Total Research column in 2014. Medical schools are organized and financed very differently from the rest of the university; conclusions drawn from these overall numbers should therefore be understood with that caveat.

“Institutional” is the sum spent by universities and colleges from their own resources on research. Note that while the Federal support has oscillated somewhat but overall flat, the Institutional component has grown steadily as a percentage of the Federal:

 

Institutional as a % of Federal

 
     

2010

31.86%

 

2011

30.93%

 

2012

33.96%

 

2013

37.99%

 

2014

41.54%

 

 

That is, by 2014 the universities contribution to research from their own resources was almost 42% of what the Federal government contributed.

A more complete picture of the institutional cost of “externally funded” research is:

 

Institutional as % of External

   

2010

24.21%

2011

23.94%

2012

26.17%

2013

28.80%

2014

30.65%

Or, for every $1,000 an institution gets from external funders for research, on average the institution ends up spending $306 of its own internal resources.

Obviously, the institutional cost of externally funded research is growing steadily over time. As the HERD survey shows, the total increase in Institutional support from internal funds over this 4 year period was about $3.8 B, or almost 32%. However, most of the components of institutional support arguably are necessary to enable the institution to attract the externally funded research - a cost of doing business.

The 2015 HERD survey breaks down the components of Institutional support over time: 


 

Totals for the numbers in this graph are slightly different from those shown in the table above. The table above included data from all 891 institutions that had research expenditures of more than $150K; this graph is based on data from the 645 institutions that had research expenditures of more than $1M.

“Direct funding for R&D” includes both University Research and (most of) Departmental Research contributions. “Unrecovered indirect costs” describe shortfalls in indirect cost recovery occurring when research grants are accepted that provide indirect costs less than the federally negotiated rates. Since the federal rate is obtained by dividing all allowed indirect research expenditures by the total organized research expenditures, this shortfall describes unreimbursed real expenditures which must be covered by university funds. This term does NOT refer to costs the universities felt were real but which the federal negotiators decided to reject. HERD data instructions are clear:”R&D does not include unrecovered indirect costs that exceed your institution’s federally negotiated Facilities and Administration (F&A) rate”. Thus this number underestimates what most university CFO’s would say is the real shortfall in recovery.

Just to keep definitions clear, OMB Circular A21 defines University Research as university funded research that is awarded similarly to federal research, i.e. there is a specifically budgeted university program that solicits proposals which describe a research program and its desired outcome, are reviewed by some (usually) internal panel, and awarded to some fraction of applicants. At the end of the grant period, financial and programmatic reports are prepared. A21 defines Departmental Research as all other internally funded research programs. Thus Departmental Research covers cost sharing (separately broken out in the table above); start-up packages, bridge funding, and seed funding for faculty; tuition aid to students working on sponsored projects; funds for visiting researchers; and everything else related to research that is not funded elsewhere.

Most elements of Departmental Research, e.g cost sharing and start-up packages for new faculty, are the “seed corn” of funded research. As such, very prudent trimming is possible, but significant cut backs are likely to lead over time to drops in external research funding.

Whatever the value of institutional Direct Funding of R&D, it is obviously the driver of the rapidly growing overall cost of Institutional R&D. Over the 4 years covered by the report, Direct Funding grew by an impressive 54.8%.

HIDDEN COSTS

The HERD instructions emphasizes by exclusion what is certainly the largest component of the hidden institutional cost of research at research universities: “R&D does not include estimates of the time budgeted for instruction that is spent on research.” In other words, course release for successful researchers cannot be charged to R&D (thus showing up in these data), but rather sits unobtrusively on the university budget as part of instructional personnel costs.

Due to the vagaries of university budgeting, it is difficult to get a hard number that captures this cost, but one can make a hand-waving estimate to get the order of magnitude of this type of cost of at research universities. In general, a reasonable estimate is that tenure line faculty at research universities are expected to spend during the academic year roughly 50% time for teaching, 50% time for research. Thus roughly ½ of the tenure-line faculty salary costs actually are attributable to research. A mid-size research university has of the order of $400M/year in “faculty salary”. If we make a conservative estimate that half of that salary is for tenure line faculty, the rest for non-tenure line faculty, then the research cost hidden in tenure line faculty salary at this mythical university is $100M/year. There are about 200 research universities in the US, so the total research component of faculty salary is of the order of $20B/year – of the order of magnitude of the Institutional R&D expenditures.

Adding this salary component to the numbers above for Institutionally Funded R&D Expenditures suggests that universities and colleges are spending more than $30B per year of their own funds on research, distinct from and in addition to the slightly more than $51B in external research funds that they expend.

This poses the obvious question: where do the colleges and universities get the $30+B per year that they spend on research that is not coming from research funding from government, industrial, or foundation sources?

HOW TO PAY THE INSTITUTIONAL COSTS OF RESEARCH?

Philanthropy and endowment income play a major role in many institutions in providing some portion of the needed research funds. However, in almost all institutions the greatest source of fungible revenue is tuition (or state support in lieu of tuition). What better place to look for support of research?

A21 opened the door to this coupling of research and education by defining (“for the purposes of this document”) Departmental Research to be a component of educational spending. Of course, A21 was focused on separating externally funded research from everything else in the college budget in making that definition, not making a judgment about the educational role of Department Research . However,in 2002, the National Association of College and University Business Officers (NACUBO) picked up on this A21 definition and officially defined Departmental Research as being a necessary educational expense in their calculation of  a greatly inflated “cost of delivering undergraduate education” to be used to placate parents and legislators upset about rapidly rising tuition.  This definition allowed Department Research to be moved into the Education budgetary category along with faculty salaries. The combination deftly intermixed research costs (both Departmental Research and faculty release time) and actual educational costs and made them one – and used this as a base to calculate a” cost of  undergraduate education”. Thus rationale for moving student tuition dollars to cover costs of faculty research was officially established.

IS THIS REALLY THE APPROPRIATE WAY TO PAY FOR RESEARCH?

But can faculty research costs be separated from educational costs? I would argue that the answer to that is a strong " that depends." The institutional costs of research described above are in most cases the cost of attracting and retaining research-active faculty. So the underlying question really is whether this set of research active faculty provides a "value-added" to the educational process that justifies mingling the costs.

For graduate doctoral education, research-active faculty are essential, and their research forms a core component of the graduate education process. Here, differentiation between research costs and educational costs essentially is meaningless. Once one leaves doctoral education, however, answers become less well defined.

Regarding undergraduate education, NACUBO stated: 

Departmental research is vital and has a direct impact on the value and quality of instruction provided to students. Any arbitrary attempt to distinguish between departmental research and instruction ignores the fact that the integration of research and education is a major strength of the nation’s colleges and universities and directly benefits undergraduates

A strong statement indeed, but one not strongly supported by data. To be honest, we in higher education have a very strong aversion to studying our outcomes, so there are few data that strongly contradict that statement as well. What this is, therefore, is an aspirational statement describing what we strongly hope is a truth, but very well may be incorrect.

What data do show clearly, is that student learning is tied more closely to the teaching methods used than to research or seniority characteristics of faculty. Unfortunately, faculty reward systems generally reward research over teaching, which leads to a situation in which many research-active faculty find little reward in learning new and better teaching approaches. Beyond this, however, is the strongly held belief that faculty who do not do research somehow become "stale" in their teaching, while research faculty do not. I know of no studies that actually address this issue, but based on long observation would guess that it is untrue for most undergraduate required courses, possibly true for some advanced specialized undergraduate courses.  In any case, lack of data again. All in all, I think it is fair to say that it is not possible at present to make a convincing, data-based argument that use of research active faculty generally leads to better undergraduate student learning outcomes than are obtained by using an equivalently degreed but not research focused faculty. (Research does strongly suggest that there are learning benefits obtained with a faculty that is full-time versus part- time, but that is a separate organizational issue.)

In Cost allocation in the research university and what it tells us, I discussed several other direct and indirect ways in which faculty research may benefit undergraduate students. For example, institutional reputation is driven primarily by faculty research prowess rather than educational effectiveness. Some analyses suggest that graduates of high reputation institutions "do better" in life - although there are also analyses suggesting that is not the case.

 At the end of the day, it is impossible to tell how much undergraduate tuition actually is used to cover faculty research costs. What we do not have in higher education is cost accounting - which would tell us the cost of the various functions of higher education. Thus it is impossible to make a judgement of how justified any amount of such cost shifting is - we can't weigh costs and benefits. What is clear is that there is considerable pressure on higher education to find the necessary $30+B each year to fund research programs, and that undergraduate tuition provides a very big and very tempting source - pre-justified by NACUBO.

CORRELATION IS NOT CAUSATION - BUT IT MAY MAKE YOU THINK

The above sections suggest that it is plausible that increasing research costs may be putting upward pressure on tuition levels. Going back in NSF reports, one finds that total research expenditures grew from $14,976 M in 1989 to $67,156 M in 2014 (current dollars). This corresponds to an average annual rate of growth of about 6.2%. Over that same period, inflation averaged 2.7% annually, leading to a real annual rate of growth of research expenditures of about 3.5%. It is curious that, as I showed in A return to the elephant of college pricing, published average real tuition marched upwards at roughly 3.2% a year during the period 1983-2013. So there is a correlation between increasing research costs and increasing tuition, at least over these time periods  Lots of apples and oranges there, but curious nonetheless. 

AND THE PROBLEM IS

The underlying problem is that higher education has decided to price funded research at less than its actual cost. This research underpricing arguably leads to a great deal of the upward push on tuition that has occurred over the past decades. Since reputations of universities are linked directly to their research expertise and external research funding - not their education - there is a continuing pressure to do ever-more funded research. As colleges and universities seek to move up the reputational ladder, they increase emphasis on funded research,which leads to a need for more internal research spending , which in turn increases the pressure to increase tuition.

This present relationship between education, research and reputation was set in place in a time when resources were less constrained. Over time,however, this coupling  of research, education and reputation with its internal feedback loop has produced an enormously expensive product. Very high expenditures in the name of "education" are required in order to balance the product budget, but perversely the loop leads to de-emphasis of education in favor of research. Unfortunately, these "educational" costs that are loaded with research costs have risen so high that both governments and individuals are finding it extremely difficult to pay them, and are rebelling and demanding to know if the outcome justifies the price. And justifying the price when the outcome actually includes a significant purposely hidden component of faculty research is particularly difficult. At the very least, justification will require some actual studies that relate educational outcomes to a wide variety of variables including research status of faculty - studies we have thus far generally tried to avoid.  

It may be time to come clean, and publicly acknowledge that the costs of doing funded research are much higher than the price payed by the sponsors. Parents, students, and governments deserve to know that educational dollars are being spent on effective education, and that faculty are being rewarded primarily for the quality of learning that goes on in their classes.  A wide ranging discussion of research funding, how large it should be and how it is allocated must be part of that process. In several countries, such discussions have led to decisions to funnel research funding to a smaller number of institutions in order to maximize research impact. Methods of determining educational effectiveness must be developed, so that reputations of most colleges and universities can be based on student learning rather than faculty research.

What we have is an enormously successful system of colleges and universities that has feedback mechanisms that lead in many institutions to ever increasing costs and ever sharper focus on high quality research at the expense of other parts of the mission. Eventually such a system will run out of resources and will not meet societal expectations based on its entire mission. One can argue that we have reached that..

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Five years ago in a post, I described a thesis study by Lauren Cooper on potential solutions to the looming workforce gap in California. Her analysis was based primarily on projections of California workforce needs in 2025 made by the Public Policy Institute of California (PPIC). Dr Cooper's analysis of the CSU - level workforce shortfall suggested that CSU needed to open 12 new campuses by 2025 to meet needs - an unlikely solution to the problems given the finances of California.

PPIC has just published an updated California workforce projection, this time aiming at 2030 needs. The new projections are similar to the earlier ones:

Our projections indicate that the demand for college graduates will outpace the supply by 2030, if current trends continue. The gap is substantial, with the economy needing 1.1 million more college graduates than the state will produce. But if the state, its educational institutions, and its people are able to improve educational outcomes, California and its residents will experience a much more successful future, with higher incomes, greater tax revenues, and lower use of social services.

Pretty much what we saw 5 years ago. Very few steps have been taken over this period to improve the situation, despite some strong efforts by Governor Brown to create movement.

The key to a better future for California residents is obviously the California public university sector. Thus far, that sector has proclaimed loudly and consistently that it cannot increase the number of graduates significantly without proportional increases in budget, i.e. it cannot find more effective and more efficient ways of educating students. This position is of very questionable merit, since numerous institutions around the country have rethought their educational approaches in order to increase participation without sacrificing educational outcomes - and in many cases have improved educational outcomes in the process.

But the bottom line remains, California's future prosperity is largely in the hands of a public higher education system that thus far has fiercely and successfully defended the status quo, supported by regents who view their job to be to protect the university rather than the State and its citizens. Surely, there is a responsible adult somewhere in the mix.

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In The future of MIT undergraduate education: a case study of disruption, I described two reports from MIT that laid out a stunning vision for the future of MIT undergraduate education. Among the suggestions of the reports are that education of the future will be unbundled and disaggregated, with online components enabling flexible time scales and location-independent participation. The second and final of the two reports calls for, among other things, bold experimentation to realize the vision,  and a recommendation that MIT move forward to consider the types of certifications that can be supported through MITx and edX. 

MIT recently announced a very interesting new program that embodies these two aspects of these reports: a new twist to MIT's one year Master's in Supply Chain Management. This modified degree program is, in effect, modularized and disaggregated. The first semester's courses will be available through edX, enabling students around the world to access them for free. Students who do well in the courses, pass a proctored exam and pay a small certification fee will be awarded a new MITx MicroMaster's certificate. For those students who want to continue with the full Master's program, the MicroMaster's greatly enhances the likelihood of acceptance into the on-campus program. Accepted students could then complete the Master's in one semester on campus.  MIT describes this as an example of "inverted" admissions in which students first try the courses, then apply for admission: 

Inverted admission has the potential to disrupt traditional modes of access to higher education....We’re democratizing access to a master’s program for learners worldwide.

Students who enter the program in this way will be charged only for their one semester on campus, saving half the price of the traditional program.

One can only imagine that MIT views this as a way to do a great study of the effectiveness of their brand of online learning versus traditional classroom learning: which group of students does the best in the second semester?  And what of the student demographics? Does this approach bring increased geographic or gender diversity to the class?

When the reports referred to above were first released, Anant Agarwal, CEO of edX and Professor at MIT, imagined a future MIT where freshmen would spend the first year taking on line courses, then come to campus for (most of) the remainder of their degree. This new program also should be providing useful data for considerations of that future.

Finally, the MITx MicroMaster's itself is an important step. This is a credential that MIT expects will have career value for those who have earned it. That is, employers will value it and reward its holders appropriately. Thus, the program is structured so that it can create value even for those students who decide not to continue to the Master's.  In addition, MIT is actively discussing with other universities the possibility of having the MicroMaster's convertable into credits in their own Master's programs. In other words, MIT is hard at work creating a name brand for its MITx MicroMaster's:

"The new MicroMaster’s is an important modular credential for the digital age, and promises to serve as academic currency in a continuous, lifelong-learning world,” says Anant Agarwal, CEO of edX and a professor of electrical engineering and computer science at MIT. “It also affords an evolutionary path for universities in the face of mounting costs, and a way to leverage technology to blend online and on-campus learning pathways.”

Is this the beginning of the creation of a second brand at MIT?

 

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In 1966, William Baumol and William Bowen looked at the origins of rising salaries for live performances (music, theater, dance), and noted that an underlying issue was that such performances could not easily be made more efficient - productivity could not be increased (Baumol and Bowen, Wikopedia). The oft-quoted ( and quite convincing) formulation of this concept is that a Beethoven quartet must be performed by exactly the same number of musicians today as was required in the 19th century, and that the quartet requires roughly the same amount of time to perform. No increase in productivity over two centuries! This inability to increase productivity should, according to simple economic arguments, lead to flat incomes - rising income usually is a result of increased productivity. However, despite this, salaries in the performing arts had risen over time. Baumol and Bowen concluded that this occurred because it was necessary to keep salaries on a par with those in industries that were seeing productivity increases in order to keep workers in the performing arts. This "push" of salaries in industries without productivity increases is called Baumol's cost disease.

Very often, when someone poses the troubling question, " why is college so expensive?", the response is simply "Baumol's cost disease", said with an authority that suggests that should settle the discussion. In fact, used in this way, Baumol's cost disease is like the magician's gesture that is designed to get the audience's attention away from place where something important is happening. In reality, customer's don't care about the cost of making a product, they are concerned about the price they must pay, and that difference leads one down a potentially fruitful path of reflection about both Baumol's formulation, and critical issues in higher education.

When increases in productivity are difficult or impossible to achieve, the price of the product often can be controlled by spreading the costs over more consumers without raising costs proportionally. In the case of Baumol's Beethoven quartet, by increasing the size of the performance hall, more customers can share the costs of the concert, thus decreasing the cost/attendee (although net costs increase because the larger hall likely costs more to rent). This trick is used in higher education, of course - we move the lecture to a bigger hall. However, technology also enables the concert performance to be "repurposed" for a variety of different, expanded audiences. For example, the the concert can be broadcast over radio or tv, carried over the internet to be shown "live" in movie houses, and recorded for later play on CDs or mp3. Each of these repurposings has additional costs associated with it, of course, and so the final costs for each includes the cost of both the original performance and the intervening technology and personnel. Each aspect of the repurposing is worth doing financially (there may be other reasons, such as reputationally) only if it helps to increase overall net revenues.

It is worth noting that Baumol and Bowen's cost analysis focused only on the original performance, not its repurposing. Most of the repurposed performances have shown enormous productivity increases over the past decades because of their large technology component. Thus only the original component - the actual performance in a concert hall- is trapped in the land of no productivity increases. 

Each of these repurposings is different from the original- hearing the quartet played in a small hall with 60 other people is very different from playing an mp3 of the concert in your car as you drive to work. But "different" does not necessarily mean inferior. Clayton Christensen argues that quality must be defined in the context of the job a customer is buying a product to do - if the product does that job very well, it is of high quality from the perspective of that customer. When I am driving to work, an mp3 recording that enables me to hear my favorite Beethoven quartet in the car is absolutely solving the problem that I want solved at that time, while having a ticket in my pocket to go to a live performance of the same quartet that evening is not solving any problem I have during my drive. Different contexts, different judgments of quality.

Higher education's first responses to cost containment was to model on Beethoven's quartets - we moved to bigger lecture halls, then recorded lectures and broadcast them, and more recently, put those recorded lectures on the internet. We in higher education have generally postulated that the purchasers of these repurposed lectures have been mislead or are ignorant because these repurposed lectures are inferior to the originals. In fact, although some customers certainly have been mislead, most are buying these products because they are the best available products to do the job the customer wanted and needed done - a job that for one reason or another precluded working with the time and location limitations of traditional campus courses.

However, the key reason that Baumol's cost disease in not the ultimate answer to the price of college question is that higher education now is developing new approaches to teaching and learning that numerous studies indicate should be more learning-effective and cost-effective than the traditional approaches. New online programs are not simply ineffective online versions of the original ineffective in-person lectures, but are carefully developed using the results of the latest in learning research. These new approaches can be used to supplement and improve the traditional "quartet" approach, or to replace it completely. In either case, opportunities to create economies of scale will occur, with resulting productivity increases.  

All in all, "Baumol's cost disease" is an excuse for not looking at alternative, potentially much more effective, approaches to education that would lower price and improve learning. "Baumol's cost disease" is only the answer to, "What will happen if we maintain the status quo?" 

 

 

 

 

 

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I recently served on a panel at a meeting organized by the California Higher Education Innovation Council to look at "Alternative Credentials and Unbundling the Degree: Meeting Employer Needs or Short-Circuiting Proven Approaches?" Our panel was challenged beforehand by its moderator, Ryan Craig, to imagine how conditions had to change over the next decade in order for alternative credentialing ("e.g. nanodegrees and badges" according to the meeting invitation) to become a major force in higher education. I will make no attempt to review the many arguments advanced on this subject at the meeting, but simply describe some of my own thoughts (however tentative) that were stimulated by this challenge.

There are obviously three broad constituencies interested in questions of higher education credentialing: students, government, and employers. My belief is that the most important of these in determining whether alternative credentialing takes hold will be employers: if employers find it truly useful, most students will enthusiastically sign on, and government will see little reason to block something that employers and students find to be of real value. 

Clayton Christensen's "Jobs to be Done" approach emphasizes that to understand an issue such as this, one must understand the problem that the customer (employers in this case) are buying the product (higher education credentialing) to solve. I think the primary answer is rather simple: employers are "buying" higher education credentialing to help maximize the probability that a new hire or a promotion will work out well for their company. There is an interesting extension of this, however, articulated by Frank and and Cook in The-Winner-Take-All-Society  two decades ago: if the hire does not work out, management is significantly shielded from blame if they hired the person with the most prestigious and established credentials.

In order to maximize their probability of success in hiring and promotion, employers need to get as much information as possible about the skills and capabilities of their applicants. Those might be divided roughly into three categories: 1)subject matter scope and mastery (e.g, level in economics); 2)higher order intellectual skills (e.g. critical thinking, postformal reasoning, creativity); 3)personal characteristics (e.g. perseverance, ability to work in groups, honesty, competitiveness). Different jobs obviously would lead to different weightings of the importance and applicability of these categories in the eyes of the employers.

Present credentialing, in the form of a degree and transcripts, is a rather blunt instrument for providing the desired information. For the relatively rather small fraction of the roughly 4,500 accredited institutions that are very selective, the degree signifies that the graduate was among the very best high school students in the nation the year that she graduated. For that subset, the degree also often tells something about the students underlying interests and strengths (a student who chooses Yale vs one who opts for MIT). For the majority of students who come from rather non-differentiated, non-selective institutions, little information of these types is contained in the degree.

For students from all institutions, the degree shows a level of perseverance, and names the major and the level (e.g.Master's in Economics). However, similar designated degrees signify greatly different things from different institutions (and probably even for two students from the same institution), and supporting information in the form of a transcript is pretty useless in teasing out desired information. What does an A or B in intermediate economics mean at this particular institution? What was covered, and what did the professor emphasize in awarding the grade?

Thus, current credentialing provides suggestions of answers to questions that employers have, but not much more. Large, data driven companies such as Google increasingly report that they can find no correlation between information contained in a transcript and the value of a hire to the company. As a consequence, there is considerable potential to make products that better address components of the problem that employers are trying to solve. That is where alternative credentialing comes in. 

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Alternative credentials typically are designed to certify levels of competency in specific domains. To be more useful than traditional credentialing, these alternatives must provide additional information about competencies not provided by the traditional degree. For example, a "badge" that certifies that I have successfully completed five Coursera courses or a course in some powerful new computer language likely will be of minimal value to employers unless supplemented with real information about competencies demonstrated. Thus the supplemental value of alternative credentials really depends on ability to articulate and measure competencies that are of interest and value to employers.

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Higher education thus far has resisted rather ferociously defining and measuring competencies that describe higher-educational attainment. The usual position is that the benefits of higher education are too numerous and of such breadth that they cannot be captured by such limiting concepts as competencies. I argued in Reputation and brand in the world of changing higher education that in fact, higher education produces both outcomes that can be measured at graduation and outcomes that can't be measured because they are produced over time by the interaction of the education, the characteristics of the individual and future life experiences. Acknowledging that some important outcomes are indeed measurable, and quantifying those measurable outcomes would enable universities to provide improved credentialing that would be of increased value to employers. One already sees that as competency based programs increase in popularity, they are likely to result in transcripts (e.g.North Arizona University) that are considerably more informative than the current norm. To be seen, however, is whether these competencies are those of interest to employers, or only describe competencies that interest faculty.

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Thus once again the issue focuses on defining and measuring competencies  - hopefully those that both employers and faculty believe to be of importance. Because of historical academic opposition to the concept of competencies, we know less about what they should be and how to measure them than would be useful at this juncture. Outside of the US, the Bologna Process and its Tuning process have struggled with aspects of the competencies issue for degrees over the past 15 years; the Lumina Foundation brought Tuning to the US in 2009 with its Degree Qualifications Profile. Lumina is now leading another effort to define a similar framework for other types of credentials. This new framework apparently seeks to define areas of skills and levels of achievement in all three of the categories above using a Bloom's Taxonomy - like approach

Competencies in the Tuning Process are defined by consulting graduates, employers, and academics. This is thus a very good step in helping to define the components of both alternative and improved credentialing. However, perfection is not easily attained. It is obvious that many words may mean different things to different groups. For example, faculty rather uniformly insist that students are learning critical thinking; employers rather uniformly say that graduates are not able to think critically. Although this different perspective may be due to differences in definition, it is important to note that neither group is basing their position on actual measurements of level of critical thinking - only impressions.  Thus, not only must the competencies be clearly defined, but methods of measuring levels of those competencies as they are defined must be developed and agreed upon. Only then will we know whether all groups are talking about the same thing, and only then will employers be able to decide if particular competencies are valuable for their employees.

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All of the above discussion relates to what we might call Instantaneous Credentials (IC) - outcomes of education that can be measured at the end of the educational experience. Another type of credential is beginning to appear, however, that we might call Real Time Credentials (RTC). Real time credentials typically are based on analysis of big data, often obtained from social media,to determine the competencies of a particular person in real time based on actual performance in life situations. That is, RTC seeks to measure some of those competencies that were not measurable at the end of the educational process.

Gild is an employment start up that has attracted considerable attention using this approach. As described by the Undercover Recruiter:

Gild says that it “goes where developers hang out” on the Internet and scores developers on the quality of their public code and professional knowledge. It then scores these developers—and has done so millions of times—to offer recruiters a deeper look into a candidate’s true skills. This eliminates some of the guesswork and blind faith that recruiters who don’t happen to be developers must employ. In addition, Gild also gathers social media activity for each candidate to help you determine culture fit.

Gild's approach does not focus on instantaneous credentials (degrees, badges, etc.) describing learned competencies, but looks at how an individual demonstrates competencies in actual work situations. In doing so, it seeks to provide important information on all three of the categories of capabilities described above. Given the discussion above regarding the limitations of current instantaneous credentials in meeting employer needs, it should be no surprise that much of the development of real time credentials is taking place in companies such as Gild that focus on enabling employers to be more successful in filling positions.

LinkedIn is taking a related but somewhat different approach to the same problem: it wants us to input our own educational and work data - us being an ever-increasing fraction of the workforce of the world. Simultaneously, it has been developing an understanding of the skills required to do the many jobs that appear as we all input our histories. By comparing and analyzing all of this big data,  LinkedIn can understand our individual competencies in real time - and then help companies looking for new talent to find a better match to their needs. Of course, it can also help us to find a new job that really fits our skills so long as we go through LinkedIn to find that job.

 

As suggested by the above, a common attribute of most of the RTC work is that the RTC is the property of the company that created it, while we own our own underlying data. Thus the RTC is not "portable" in the sense of a CISCO credential or a college diploma. As Ryan Craig has pointed out, potential employers are likely to want to look at some of the data underlying the RTC, thus setting up an interesting ownership discussion.

 

One challenge facing the creators of  RTC is very similar to that of the producers of IC - competencies must be defined, the ways in which they are manifested or measured must be determined and the pertinence of those competencies to employers must be demonstrated. Success in a particular job is unlikely to be determined by a unique set of competencies, and there are many hidden variables when comparing one position with another.   

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But what of Ryan Craig's original question to the panel: what must change for these various alternative credentialing approaches to become a major force in higher education? First, there is a "push" towards alternative credentialing caused by the lack of useful information for employers contained in traditional degrees and transcripts. The obstacle that must be overcome, however, is that we don't know how to define and measure many of the most desirable competencies.  That is the change that must occur to enable a major perturbation to the current near monopoly for credentialing held by traditional higher education.

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Arizona State University (ASU) and edX recently announced a joint project to offer an online freshman year with full official credit from ASU - The Global Freshman Academy:

“We’re going to have 12 new courses, of which students will take eight,” Mr. Crow (President of ASU) said. “They have to be constructed at a fantastic level of digital immersion, not just talking heads. This is a general education freshman year, not a series of disconnected courses, so they have to be thought through together.”

All courses will be designed and taught by leading faculty at ASU. Whether the Department of Education bugaboo of competency based testing will be used is not clear from information I have seen. 

This is truly an "open admissions" program, with no entrance requirements. Students pay nothing to take the courses, only paying after successful course completion if they desire to get ASU credit. Projected cost for the credit will be no more than $200 per credit hour. The combination of relatively low cost, online accessibility and convenience, and college credit from a major institution certainly make this a great experiment, and may well make this a very successful program. 

ASU has a strong existing online program with focused and strong student support that has led to an astounding 89% retention rate. Should similar rates be obtained in the Global Freshman Academy, it would be a first for MOOC-like courses. 

A few years ago, I thought a new age was dawning with the establishment of Semester Online - a consortium of almost a dozen highly ranked institutions that would be offering a number of credit bearing courses online.This, I thought, could be the beginning of an experiment to allow students to customize their own educations. Unfortunately, that consortium was rather short lived, in large part because of objections from faculty at the member institutions, and the experiment died. ASU and edX have restarted that experiment by offering students an alternative way to pick up the often-generic first year of college.

Another radical thing is happening in this program, if Crow's statement above is correct. The general education program is being thought of as a whole, rather than as a set of barely connected courses - an approach greatly encouraged by extensive educational research, but hardly ever seen in the actual world of higher education where "academic freedom" ensures that faculty teach what they will. This general education program could become a model of how general education should be done!.

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Universities often report a number that appears to indicate how much the university spends on instruction. We might believe that this number accurately represents teaching expenses and even do some analysis based on that belief. We would be wrong to do so. 

John V. Lombardi, in How Universities Work

This somewhat cynical observation by Lombardi was informed by his broad and sometimes painful experiences as Provost at Johns Hopkins University, President of the University of Florida, Chancellor of the University of Massachusetts at Amherst, and President of the Louisiana State University System. However, in these times of heated discussions over who should pay for higher education and a background of rapidly increasing student debt,  it is important to have some idea of what the actual costs of producing that education are. In this post, I review some of the reasons why it is difficult to define the instructional costs at a research university, and why various constituencies might not want that information to be generally available. After discussing how a business model view simplifies some of the issues around calculating instructional costs, I describe a recent analysis of such costs in the University of California system, which reaches some surprising conclusions. These conclusions lead to a consideration of why cost -shifting between missions is so important in the current approach of the research university. Taken together, these results suggest that one of the key issues that should be focused on in order to control higher education prices are the synergies between the different functions of the research university and the actual "added value" to the customer of those synergies. In particular, the analysis suggests that rising prices in undergraduate education are not likely be controlled unless society finds alternative ways to fund a significant component of the cost of university research. 

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Readers of this blog know that Disrupting College by Clayton M. Christensen, Michael B. Horn, Louis Caldera and Louis Soares (CHCS) reveals some key aspects of the operations of a research university. In particular, CHCS show that the research university operates three different generic types of business models simultaneously as it carries out its missions of teaching, research, and social growth of students. This type of multiple business model operation leads to very high operational overhead rates, leading to high costs. In part this overhead is due to the fact that the constraints imposed by operating several business models simultaneously means that no one of the models can be optimized with respect to cost. It is important to recognize that these constraints also make it impossible to optimize any of the models with respect to quality of output.

Thus, one part of the difficulty of defining educational costs is the interlocking business models that lead to individuals and facilities being used in multiple activities. In addition, as I pointed out in A business model view of changing times in higher education :

...when running several business models simultaneously, there is great opportunity for cost shifting from one component to another when the organization wants to discreetly cross subsidize activities. It thus becomes very difficult, if not impossible, for customers to understand exactly what they are paying for.

That is, some of the difficulty in determining costs of individual components of the operation is that we prefer it that way - it lets us put our thumbs on the scale to reflect the way we in higher education prioritize the component activities of the university.

We enable (encourage?) this indeterminacy through our accepted form of higher education accounting - fund accounting. The focus of fund accounting is on management of individual sources of income, rather than on the expenses related to particular activities. As Lombardi points out;

Although fund accounting does not prevent universities from understanding their finances, it does not require them to do so. 

Cost accounting, on the other hand, focuses on understanding the actual costs of a product, so that management can manage those costs. As such, it is primarily a management tool for the creation of efficiency and informed decision making. So, to find out the cost of education in a university, we have to change our mindset and do cost accounting.

It is important to recognize that this approach of intertwined costs has been very successful overall for America and its higher education system. Allowing university administrators to follow their own priorities in cost shifting and cost sharing between activities such as research and teaching has resulted in an enormously successful university research enterprise, and a highly respected educational system. In a system in which costs are transparent and cost shifting does not occur, the priorities and the balances will be determined by the collective priorities of the payers - students and parents, government, foundations, etc.Outcomes could be quiet different from those currently defined by the providers!

In a conservative "don't fool with success" mode, one could argue that we should not try to clarify the actual uses of resources.  Two reasons why this is not the appropriate response at this time jump out. First, there is an enormous pressure on higher education to lower educational costs, which have grown much faster than inflation for many decades. The current system, which demands large annual real cost increases, is broken. It is very difficult to do experiments to lower costs of education if administrators do not know the original cost and the contributions of the various components of education to that cost. Does a new approach lower costs or increase costs? Does a change of emphasis or priority raise or lower cost? For this, cost accounting with its transparency is absolutely essential. Second, with the increasing emphasis on having students (and or their parents) pay for their higher education, they have every right to demand to know what the actual cost of producing that education is. They should not be going into debt to fund other activities of the university unless they choose to do so.

Business Model Insights for Cost Accounting in

Research Universities

Of course, it is not trivial to isolate costs when there are multiple business models running simultaneously. In the university case, faculty perform multiple functions, as do facilities such as classrooms, labs, and libraries.  Some have argued that the research university is a classic example of the joint products problem, in which multiple outputs are created from a single input using the same general process. In such cases, assigning costs up to the divergence into different outputs is essentially arbitrary and can be shown to offer almost no management value. However, I argue that this is not a joint products problem, and that the business model approach of CHCS suggests a different perspective: this perspective facilitates calculation of specific costs by sharpening the definition of what is to be calculated, and, more important, highlights some of the key issues that call for increased transparency and discussion. 

A business model describes how (processes and resources used) and why (who the customers are and what they want they want the product to do) a product is made and its cost of production. So a logical use of cost accounting in a multiple business model organization is to analyze the different business models present in the university one by one. (For a detailed view of the business model approach to higher education, see A business model view of changing times in higher education.)

In this approach, we begin by considering the business model for the educational function , and then focus on how that model interacts with the research business model. We will pay little attention to the student social growth business model, which is of importance itself because it is the origin of much of the "arms race" that helps to drive up college costs. However, it does not raise many of the critical issues presented by the other two models.

Education, according to CHCS, follows the generic Value Added Process business model, in which (generically speaking) an incomplete input is transformed into an output which is more complete and of higher value. For the traditional student body, there are really two broad but distinct inputs to this model: undergraduates, and graduate and professional students (in fact, a thorough cost accounting could break those those two inputs into finer categories). These two distinct "inputs"  are associated with different value propositions, and move through the system following somewhat different processes. In fact, they follow different business models (both of the same generic Value Added type). Consequently, assigning costs for the components of the educational function itself is not an arbitrary joint products exercise without management utility, but is a definable exercise that can have significant value for the types of management decisions needed to control spiraling tuition.

Perhaps the most important consequence of doing a cost analysis based on the various business models is that it shows that the discussion should not be focused on determining the cost of the individual business models. Instead, the critical discussion really needs to focus on the value added by the presence of multiple business models - and for whom the value is added.

Cost Accounting for the University of California System

An example of a cost accounting approach is given in two interesting articles by Charles Schwartz, Professor Emeritus at the University of California (UC) Berkeley. In these articles, Schwartz attempts to quantify actual undergraduate educational costs in the UC system: Cost Accounting for the Academic Missions at the University of California, and Reform the Funding Model for the University of California. He bases his calculations on analyses of numerous public budget documents of the UC. I will say that most published budget documents of all kinds are meant to give the minimal required information while artfully obscuring information that leadership would prefer not be in the public domain: reading of several of the UC documents used by Schwartz shows that the UC truly is a master of this approach. Consequently, I can't speak to the accuracy of Schwartz's derived data (he has spent years trying to decipher these documents, I have not). However it is obvious that his approach is appropriate (with one minor caveat from the perspective of this post) and serves to point out some of the very important questions about the interplay of the different business models that rightfully should be addressed publicly.

Schwartz's approach is to build the undergraduate cost budget from "the ground up" by separating undergraduate related expenses out the general UC budget. Obviously, a large expense item in the budget of a research university is the faculty salary line. Schwartz begins by using an existing UC faculty survey of workload to break down average faculty salary into components of undergraduate teaching, graduate teaching, research, and service. Not unexpectedly, the result is close to the "generic" research university assumption of 50% teaching - divided between undergraduate and graduate - and 50% research. In the UC case, faculty reported that the teaching time was roughly evenly split between undergraduates and graduates. Thus about 25% of faculty academic year salary should be allocated to the cost of undergraduate education and a similar amount to the cost of graduate education in any cost analysis. He also divides up expenditures of adjunct faculty and TA's along the lines of course assignments to decide how to allocate that component of the budget. He makes guesses as to the appropriate ways to allocate costs of libraries, student services, etc. among the functions. (I suspect that quiet good estimates of these allocations have been obtained for the UC for indirect cost negotiations, but those numbers are not publicly available.) In this last step, his calculation differs somewhat from what I suggest above in that e.g. many student services costs are actually part of the student growth business model. However, that makes little difference for the purpose of this discussion.

To make the next very important step, I must digress a bit and talk about the various types of research. There basically are three categories of research that pop up in accounting. The two well defined categories both belong to Organized Research: Sponsored Research and University Research. As defined in OMB Circular A21:

(1) Sponsored research means all research and development activities that are sponsored by Federal and non-Federal agencies and organizations......

2) University research means all research and development activities that are separately budgeted and accounted for by the institution under an internal application of institutional funds......

That is, both of these types of research appear as specific defined projects in a budget that are accounted for at the end of the budget cycle; university research funds are typically dispersed through an internal competitive application and award process.  The third type of research expenditure, called Departmental Research, is "everything else". Into this category go such university expenditures as start up funds for new faculty, seed funds for new research projects, bridge funds between grants, funds for visiting researchers, course release for faculty so that they can do their own research, and faculty specific gift accounts. Thus, Departmental Research can represent a very substantial faculty research-related expenditure for a major university.

Unfortunately, A21, which focuses on the organized research of an institution, contains the phrase

Departmental research, for purposes of this document, is not considered as a major function, but as a part of the instruction function of the institution.

This phrase echos a position taken in an earlier report by the National Association of College and University Business Officers (NACUBO), Explaining College Costs. This report was written to provide guidance to colleges and universities in explaining why tuition is so high: costs of education are even higher. To make this argument, it was desirable to have a uniform approach to calculating educational costs so that most institutions could say similar things. One might cynically argue that it was critical to the argument to define terms so as to make the calculated cost as high as possible. In any case, the approach chosen was to include all of Departmental Research in the cost of education. This brings up some major questions to be addressed later, but suffice it to say, thanks to A21 and NACUBO, in most university budgets Departmental Research is absorbed into the Education category and can no longer be broken out easily.

Despite this obstacle,  Schwartz makes an attempt to remove Departmental Research from the calculation of undergraduate teaching costs. Putting all of his numbers together, he concludes that the actual amount of spending per undergraduate student on the education function at the UC in 2013-2104 is $7,500. This number is considerably less than the 2013-2014 average expenditure per student (averaged over both graduate and undergraduate students) of $18,060 reported by the UC. Schwartz's calculated expenditures for undergraduate education are, in fact, even less than the tuition and fees currently required of the students! As far as I can tell, neither Schwartz nor the UC include major capital costs (e.g. buildings and their replacements) in their calculations, probably because that comes out of another budget in the UC system.

Although Schwartz takes into account a large number of effects, it is revealing to note that most of the difference between his calculated costs and those of the UC apparently relate to only two effects: his attribution of only 1/4 of faculty academic year salary to the cost of undergraduate education, and excluding Departmental Research from the calculation. Those are clearly appropriate decisions for a cost accounting of undergraduate teaching business model.  In a similar vein, 1/4 of faculty academic year salary should be attributed to graduate teaching in cost accounting for that business model, and 1/2 of faculty academic year salaries and Departmental Research should be combined with Organized Research in the cost accounting of the research business model. That is, Schwartz's calculation suggests that the UC calculation has shifted costs equal to about $10,000 per undergraduate from the graduate education and research functions to the undergraduate instruction function - or about $2B overall for the UC.

Schwartz's calculation suggests that doing a cost accounting analysis of the major business models represented in a research university is conceptually relatively straightforward and has the benefit of clarifying some of the aspects of cost sharing and cost shifting that can occur in a multi-business model budget.  

 

The Importance of Cost-Shifting in Maintaining the Status Quo

of the Research University

I mentioned above that the cost-shifting from research to teaching was in the overall interest of the research university. The reason that this is true is that reputation- building research is very expensive - in fact, more expensive than society has been prepared to pay directly thus far.

 We saw above that the funders of research do not pay for the 50% of faculty academic year salary that supports research in a research university, nor the very important components of Departmental Research such as new faculty start-up funds. In addition, a major university expenditure is the University Research component of Organized Research. University Research includes, as noted above, internal funding of research projects that are competitively awarded and evaluated at their end, and also cost sharing expenditures which may have been necessary to obtain some sponsored projects, and a very nasty thing called incomplete recovery of indirect costs.  

This last item is worth discussing because it brings up a few misconceptions about sponsored research - e.g. that it is revenue neutral (or even positive) for the institution. Direct costs of organized research are those easily attributed to a specific project, such as equipment, materials, summer salary for faculty, postdoc salaries, and travel. However, there are additional costs of the research that are harder to attribute to a specific project, such as building maintenance, support services such as libraries, and general university administration - the indirect costs. These costs are attributed to specific projects through use of an average indirect cost rate that is obtained by dividing the total university indirect costs for organized research by the total direct cost of organized research. Each grant is then composed of a direct cost component and an indirect component that is obtained by multiplying the direct component by the indirect cost rate. This procedure in principle then leads to each university being able to achieve "full recovery" of its total indirect and direct costs for organized research when summed over all organized research projects - that is, the organized research will be revenue neutral for the university. Of course, the University Research component of the organized research has to absorb its proportional share of the total indirect costs, as should every organization that supports some component of the organized research. 

Unfortunately, not every organization that provides research support is willing to pay full indirect costs appropriate to the direct cost funds that they provide. Most foundations and corporations, for example, will not, and state and local governments often will not either. This "incomplete recovery of indirect costs" leaves some portion of the actual total indirect expenditures for organized research uncovered by external funds - expenditures that therefore must be covered by internal university funds. That is, organized research is revenue negative, not revenue neutral. 

The NSF report on expenditures for R&D in FY 2012 provides details that enables us to see the magnitude of these various university research expenditures summed over all research universities. University internal expenditures for R&D that year totaled about $13.6B; for comparison the total Higher Education Federal R& D for that year was about $40B. That is, universities' internal research support was almost 35% as large as the total university research support provided by the federal government. If we assume most of this research occurred in 200 institutions, then the average research university put $70M of its own funds into research of its faculty! The total university research expenditures of $13.6B are divided into the categories:

institutionally financed research             $7.7B;

cost sharing on sponsored projects       $1.3B;

incomplete indirect cost recovery          $4.6B.

"Institutionally financed research" is defined in this NSF report as including competitively awarded internal grants, startup packages and bridge funding, other department funds, and tuition assistance  for research personnel. No breakdowns are given of the contributions of these categories, but they reflect components of both University and Departmental Research as defined by A21.  

Thus we see that a very large proportion of research costs in universities is not paid for by external entities, but must be covered by the universities themselves. The dollar amount of this university funded research is, in fact, growing rapidly, as shown for the period 2010-2013 in a Feb. 2015 NSF report.
Earlier NSF data show similar growth over the past several decades. Although some relatively small portion of these internal research costs may be covered by restricted endowments and the like, most of these costs must be paid out of unrestricted funds. Importantly, for most universities, by far the largest source of unrestricted income is student tuition or state funds nominally labeled as educational funds. As a consequence, the ability to do cost shifting..

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A few years ago, I identified a few organizations that I thought were doing things in higher education that were examples of approaches that potentially could be disruptive to the field (Potential disruptions in the higher education space). Among these is StraighterLine, which offers primarily introductory level college courses much more inexpensively and flexibly than traditional colleges and universities.  Entry level courses are relatively similar in many if not most colleges, and at the same time are the most profitable for the colleges because they are most often taught in large classes. If students in large numbers were to opt for the StraighterLIne combination of online convenience and low cost, it would prove quite disruptive to the budgets of many traditional institutions. 


Time has moved on since my original designation of StraighterLine as a potential disruptor, and an update is called for to see if StraighterLine continues to look like a disruptor. For context, it may be useful to review some of the steps Christensen has identified in the development of a disruptor. The typical disruptor begins by using a new approach to make a product that is decidedly inferior to the existing dominant product, but which has some characteristics that are different from those of the dominant product. Almost always the approach is one that leads to a less expensive product.  However, If this new product is "good enough" to meet the needs of some set of customers, it will sell despite being inferior as judged in the dominant market. Most often this set of customers is composed of those whose needs are not met by traditional products ("nonconsumers"), or for whom the traditional product does the job but with too many expensive and unneeded "bells and whistles" ("overserved"). If the new product does find a market, then the producer has the financial resources to improve the product over time. The product thus increasingly becomes comparable in quality to the dominant product, but at lower cost. In the final stage of disruption, the traditional customer base finds the quality and price combination of the new product to be superior to the quality and price combination of the old product, and move rather swiftly to the new product. As Christensen points out, this entire process can sometimes be quite rapid, but often takes many years to reach the tipping point.

So how does StraighterLine fit this scenario? StraighterLine's concept was to use online courses obtained from outside vendors rather than having a traditional faculty and facilities, and to use a radically different- and lower- pricing model. There have always been and always will be complaints about its educational quality that are motivated by the fact that it doesn't do things in the "correct" way using the right business model.  In earlier times there were also reasonable complaints about the quality of some of its courses. Nonetheless, it found students who valued the freedom offered by the flexible online programs and the low price.True to the disruption model, over time this customer base has enabled (and encouraged) StraighterLine to continuously improve the quality of its courses. The primary provider of online course material is McGraw Hill, and the courses are outcomes based, thus enabling students to move at their own pace. The Council for Aid to Education provides many of the learning assessment tests used to measure student outcomes. StraighterLine now has a partnership with Carnegie Mellon's Acrobatiq,  a pioneer in outcomes-driven adaptive courseware; together, they are working to bring this powerful approach to some of StraighterLine's courses. In addition, some of the courses now are augmented via Professor Direct, a StraighterLine platform that brings a bit of the traditional higher education approach to the online space: Professors from elsewhere who are interested in leading course for StraighterLine can add instructional materials and personal engagement to enrich the basic course, although the assessments remain the same. From very early days, StraighterLine offered fairly robust student support via student advisers and online tutoring that was unusual for online programs. 

Obviously, there is no way with the current accreditation system for a faculty-less institution such as StraighterLine to be accredited. However, its courses now are of a quality that all of them have received American Council on Education CREDIT recommendations of college course equivalency. StraighterLine now has more than 80 partner regionally accredited institutions that have committed to accepting the CREDIT recommendations for students completing StraighterLine courses. In another sign of recognition of quality, 11 institutions now offer scholarships to students who successfully complete four StraighterLine courses. A survey of StraighterLine students showed that for those who sought to obtain college credit at a regionally accredited institution for having completed a StraighterLine course,over 90% were able to do so.  All of this suggests that StraighterLine's strategy of course by course "accreditation" by ACE is able to overcome some of the obstacles that arise because it is not eligible for institutional accreditation.. 

At present, StraighterLine has roughly 15,000 students taking courses during the year, a number that has been increasing steadily over time. The students pick StraighterLine to do a variety of "jobs", e.g. college students who have been closed out of some required introductory class, deployed military personnel not wanting to interrupt their education, and high school students wanting to get ahead.  

A particularly interesting subset of StraighterLine students was described recently in Inside Higher Education(IHE). Western Governors University (WGU) (another of my original potential disruptors) is almost but not completely an "Open" university. Like all other higher education institutions, it is under some pressure to increase its retention and graduation rates.One of the biggest graduation rate obstacles for open admission institutions is that, because of their inclusiveness, they admit some students who simply are not prepared for college-level work. In order to cut down on admissions to underprepared students, WGU does reject some applicants who appear to fall into that category (for example, if they have fewer than 12 college credits, particularly if they lack credits in writing and mathematics). One of the recommendations that WGU gives to these underprepared students is to consider StraighterLine, suggesting that it is a place they can gain the background needed for WGU at a very low price. WGU obviously has been very pleased with the results of this arrangement: it accepts 94% of the students who have completed at least two courses at Straighterline. These students do unusually well when they come to  WGU, and have year-to-year retention rates above 90%. This, alone, is a pretty strong indicator that the quality of the education at StraighterLine is reaching levels that are competitive with much of the market.

In this partnership, StraighterLine is clearly demonstrating that it can successfully provide certain kinds of remedial education for students who want to enter an online accredited degree program but who lack appropriate preparation, and can do so at very low prices that do not leave students with significant debt. In doing so, it benefits its partner institution by lowering its graduation rate risk from unprepared and unmotivated students. Thus StraighterLine is providing a win for both the students and the partner institution. 

In fact, this type of situation is typical in the growth of a disruptive innovation. In most cases, dominant established organizations are pleased when the upstart potential disruptor takes over their least desirable customers. It is a result that typically brings benefits to the established organization by allowing increased focus on the better, more demanding customers. At the same time, of course, it it expanding the customer base of the potential disruptor, which enables the disruptor to increase quality. In any case, the history of disruption suggests that it would not be surprising to see additional established institutions creating such referral relationships with StraighterLine as a way to rid themselves of what is becoming their least desirable customers - underprepared students at high risk of lowering graduation rates.  

At this point, StraighterLine seems to be following a very traditional pathway for a potentially disruptive concept. It is continuing to build sales among underserved and overserved student groups, and continuing to refine and improve its educational products. Its (necessary) strategy of using course by course ACE endorsement rather than institutional accreditation slowly seems to be gaining traction. So although we don't know whether it will ever be disruptive, it should stay on my list of potentially disruptive organizations.

 

 

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The advertisements in a newspaper are more full of knowledge in respect to what is going on in a state or community than the editorial columns are.
Henry Ward Beecher

The editorial board of the Los Angeles times weighed in on December 29 on the funding situation of the UC system with Finally, UC gets budget attention  . This latest Times editorial joined earlier ones about the UC in demonstrating a certain naivety on the part of the Times editorial board in matters of higher education in California. The editorial strongly supports President Napolitano's solution to the UC problems - send more money - and egregiously mischaracterizes Governor Brown's proposals as "mechanistic". If only the UC issues were simply about "budget"!

The research university provides many critical societal benefits, but it also provides the most expensive collegiate education yet invented. The American research university grew up during the last 60 years, which was a period when the American economy moved strongly upward on the average. The latter part of this period was also a time in which many individuals and governments spent even more than they made, funding desired activities with increasing debt. As a society we became unsustainably over-leveraged. Governor Brown has made some efforts to cut back on California's enormous overspending and overcommitting, but he has only scratched the surface and more radical steps are likely to be necessary in the future. Return to the halcyon days of yore is highly unlikely!  

There is no rational reason to believe that the research university generally and the UC specifically has magically reached its optimal organization and mission either under the former "flush"times of spending, or the new "realistic" times of spending. Thus preserving the status quo of the UC should not be a priority - the priority should be to evaluate how the UC can best be organized to meet California's current and future needs, priorities, and resources, and then working toward that forward-looking organization.

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What should be the key roles of a public research university in California? Others will certainly have their own lists, but mine is topped by the obligation of the of the public university to provide education and research needed to support the health of the economy in the state. The education component must relate to both the number of people educated, and the quality of the education.Many of the other roles that a public university should play, such as enabling and encouraging economic and social mobility, are closely tied into this role.

Without trying to be exhaustive, here are four issues that must be addressed if the UC is to play this key role effectively in the future: 

1.One of the 800 lb gorillas typically ignored in budget discussions around the UC is the future workforce needs of California. The Public Policy Institute of California estimates that by 2025, California will have a shortfall of about 1 million college graduates compared to the needs of California's increasingly complex economy. Since roughly 75% of bachelors degrees in California are produced by the UC and CSU, it is obvious that the UC must take the lead in meeting this shortfall. It is equally obvious that the UC with current organization and approach can only provide the necessary ramp-up in degrees if resources are greatly increased - which is highly unlikely to occur given all the competing (and increasing) pressures for state funds. (In the present budget kerfuffle, Napolitano is proudly promising an expansion of 5,000 slots system wide. That is just a "round-off" change compared to the problem.) It is this recognition that lead Governor Brown to make some of his so-called "mechanistic" proposals. Whether they are the best proposals to resolve the problems can be debated, but at least he acknowledges this critical issue which is ignored by those who are focusing on protecting the status quo.

2.Not only is the ability of the status quo UC to educate the needed number of students over the next decade questionable, but its ability to deliver the even higher quality education demanded by the times deserves some discussion. There are an increasing number of studies showing graduates of all types of higher education institutions (including the highest ranked research universities) did not learn much of what we thought they learned. The UC universities are justifiably thought of as among the best in the world, but unfortunately that reputation says little about undergraduate educational outcomes: research universities reputations depend primarily on faculty research and the graduate teaching that accompanies that research. I know of no data that suggests the UC undergraduate education is either better or worse than the norm in research universities, but the data increasingly indicate that that norm is not sufficient to define high quality education in an increasingly competitive world.

3.Student body characteristics have also changed greatly over the past few decades, and will change even more rapidly in the coming years. The percentage of students at 4 year institutions who are full time students has been dropping for years, and among those who are full time, the percentage who work over 20 hours a week has been increasing. These changes are occurring because of growth in several key parameters such as educational costs, percentage of undergraduate students who are older than the traditional 18-22 group and thus more likely to have a family, and numbers of college students from lower income families. Students are increasingly thinking and responding like customers, and expecting that institutions will meet their needs rather than offering an idealized four- year package defined in more homogeneous and static times. To continue to attract the best students in the future, the UC must develop a flexibility of program that allows individual students to gain an excellent education on a schedule that fits their financial and family situations and advances their own educational goals.  Some students will certainly want to to receive a traditional four year residential education, but others will be much better served by more flexible options. To provide this flexibility will require very significant changes in institutional structure and outlook.

4.One might also argue that one of the roles of a state research university should be to attract the best and brightest students from around the country and the world to the state.  After all, studies show that students are very likely to stay in the region where they go to college  By looking at Silicon Valley firms, one can see an example of the contributions that are made to the California economy by non-California natives who were attracted here by higher education. If one were to conclude that this is a significant role for the UC, then treating out-of-state students as cash cows carries a significant risk.   

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Interestingly, the very high cost of running the research university and the quality of the undergraduate learning are related issues, as explained by Christensen, Horn, Soares, and Caldera (CHSC) in Disrupting College. The research function of the university and the teaching function are organized, funded, and carried out in very different ways - in other words, they have very different business models. As CHSC show, an organization that utilizes several business models simultaneously incurs very large overheads, leading to very high cost. In addition, the constraints imposed by running multiple business models simultaneously means that no one function can be optimized. That is, each function is likely to be more costly and less effective than it would be if it were being done independently. In a research university, the emphasis is on bringing the research function as close to optimum as possible within the constraints of the system, which means that the education function is pushed to a significantly less optimal position. For example, the faculty reward system in a research university is extremely highly weighted towards research excellence, and teaching excellence generally receives at best only lip service. Thus there is little surprise when most faculty show little interest in time consuming study and implementation of newer, demonstrably more effective teaching methods. Because of this coupling, successfully addressing some of the core aspects of the high cost of the research university model is likely to produce better student learning outcomes and satisfaction. 

Addressing the business model issues also potentially opens up increased opportunities to create alternative approaches and economies of scale that would enable the system to increase enrollments significantly and offer greater student flexibility while maintaining and increasing learning. A number of forward-looking universities that understand that the status quo is simply not sufficient for the future have begun to explore some of these alternative approaches. For example, MIT's preliminary report of The Institute Wide Task Force on the Future of MIT Undergraduate Education provides some fascinating brainstorming on the subject. That report discusses replacing courses with modules, broad integration of MITx- and edX- level online courses, competency-based evaluations, all leading to an unbundling of the traditional educational approach, which then offers potential for a "Student-Centric Reaggregation of Education Systems".  The UC, to continue to be viewed as a leader in higher education, needs to lead the creation of  the future instead of digging in to preserve the past.

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Several UC campuses recently have suggested that they wanted "independence" from the system because of its stifling bureaucracy and high added cost. That would seem to suggest that in these difficult and changing times a thorough review of the system and its mission might be appropriate. Surely there are aspects of the system that have been good for California and the students, but likely there are aspects that do not lead to positive outcomes. Time to emphasize the former, and junk the latter even if that should turn out to be a "job killer" for some bureaucrats.   

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If I were to write the LA Times editorial page, I would argue that the UC should not expect additional taxpayer money or be allowed to make major increases in tuition unless it uses the increases to build for a future in a very different and challenging environment, rather than using the increases to support ultimately doomed efforts to preserve the past. But then I am not as wise as the Editorial Board of the LA Times. 

 

 

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