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Cost Control in Higher Education

Colleges and universities can break the barriers to cost control. A new white paper outlines how.
University Business, Sep 2006

Colleges and universities provide a setting for the contemplative life. The word "school" is derived from the Greek schole, meaning leisure. Efficiency is not always prized on campus, and this spirit has translated to fiscal matters. Bowen (1980) captured the spendthrift philosophy of higher education in his "revenue theory of cost": "Each institution raises all the money it can" and "spends all it raises" (p. 20).

College costs have escalated for reasons rooted primarily in organizational culture and market forces. Institutions of higher education often have defined quality in terms of resources acquired rather than results achieved (Guskin,1994; Lovett, 2005). Colleges and universities have survived profligacy through monopolistic competition, achieving sufficient differentiation from other institutions by geographic location and programs (Bowen, 1980). But high technology, which supplies the capacity to deliver academic programs at a distance from the physical campus, is eroding the product differentiation so long enjoyed by traditional colleges and universities.

The pressure on institutions to control costs has likely never been greater. Tuition at four-year public institutions in the 2003-04 academic year increased at the highest rate in three decades, an average of 14 percent more than the prior year (Farelle, 2003). State appropriations to public colleges and universities fell 2.1 percent from the 2002-03 fiscal year to the 2003-04 fiscal year--the first decline in 11 years (Hebel, 2004). Colleges and universities, particularly private institutions, are only now recovering from endowment losses in 2002. The National Association of College and University Business Officers' study of endowment for that year showed that institutions of higher education lost 6 percent on their investments, marking the first time investments had declined for two consecutive years since 1974 (Lyons, 2003). In company with other employers, colleges and universities struggle with the escalating cost of health care for employees. Health insurance premiums rose 13.9 percent in 2003, the third consecutive year of double-digit increases (Basinger, 2003).

Barriers to Cost Control

Institutions of higher education confront many barriers to cost control. Perhaps the most basic impediment is poor cost information. Progress toward improved costing for higher education was advanced in the 1970s by the work of the National Center for Higher Education Management Systems (NCHEMS), but the cost systems proposed by NCHEMS largely were abandoned in the affluence of the 1980s (Turk, 1992). Day (1993) noted "no general consensus on costing methodology in higher education" (p. 13). Even now internal management reports focus on salaries, travel, and research costs, and generally ignore such indirect costs as facilities and administration.

Higher education is also a labor-intensive endeavor, making gains in productivity more difficult and exposing institutions to the spiral of benefit costs. Moreover, consensus management continues to pervade academic administration and bring inefficiency to the decision-making process (Zemsky and Massy, 1990).

Various strategies are suggested for cost control, arranged according to the context of administration, instruction, and athletics.

1. Outsource functions that are not core competencies, especially vending, dining, and bookstore operations.

Outsourcing is common in institutions of higher education, but its adoption by colleges and universities has been documented less than its acceptance in business organizations. Dining operations and bookstore operations were generally the first functions outsourced by higher education institutions (Nicklin, 1997). Colleges and universities tended to outsource dining and bookstore operations because the institutions lacked the special expertise necessary to perform these functions (Abramson, 1994).

Large public institutions usually operated their own food service, but in recent years, a trend toward the outsourcing of dining operations has been observed among these institutions. The decision to outsource dining operations at large public institutions has been driven primarily by financial reasons. For example, contractors often have provided capital to assist in the renovation of dining facilities, projects long deferred by the institutions (King, 1997).

The outsourcing of functions has helped colleges and universities not only to save but also to make money. The experiences of Clemson University (S.C.) and the University of Georgia in outsourcing their bookstore operations are typical. Contractors are generally far more skilled than institutions in the marketing of merchandise (Gose, 2005; Mercer, 1995).

2. Streamline the decision process.

Colleges and universities often have borrowed from the faculty the collegial model for decision making and installed a consensus management approach to administration. This administrative style has brought inefficiency to the decision-making process and has obscured responsibility within that process. Zemsky and Massy (1990) compared higher education administration to a "lattice that has grown, much like a crystalline structure, to incorporate ever more elaborate and intricate linkages within itself" (p. 37). Administrative positions frequently have been created to solve specific problems, but the positions remain after the problems are solved.

To address the problems of consensus management and centralized decision making, some institutions have adopted responsibility center management (RCM). RCM is predicated on a devolution of budgetary authority from the central administration to individual academic units. These units are called responsibility centers. With greater fiscal autonomy and flexibility, each center assumes the burden of cost control and self-sufficiency. Decision making is thus vested in administrators proximal to the issues and information. RCM has been implemented at Indiana-- University Purdue University Indianapolis (Stocum and Rooney, 1997), the University of New Hampshire (Leitzel, Corvey, and Hiley, 2004), the University of California at Los Angeles , the University of Michigan, the University of Pennsylvania , and the University of Southern California (Wilms, Teruya, and Walpole, 1997), as well as within the athletic department at Georgia Institute of Technology (Strupeck, Milani, and Murphy, 1993). A variant of RCM, contribution margin budgeting, was adopted by the Iowa Valley Community College District in order to avert bankruptcy. Contribution margin budgeting differentiates between direct and indirect costs and thus facilitates cost control (Tambrino, 2001).

3. Limit legal and regulatory exposure.

Administrative costs have risen due to external pressures such as federal regulation and the micromanagement of institutions by state agencies and governing boards. Despite these factors, higher education enjoys autonomy greater than other societal institutions. The experiences of K-12 education are instructive. An alphabet soup of accrediting agencies dots the landscape of K-12 education. The National Council for Accreditation of Teacher Education (NCATE) has the strongest influence on teacher education programs, and the Interstate School Leaders Licensure Consortium (ISLLC) is perhaps the primary arbiter of school administrator preparation. Yet other interest groups advance their causes, and each state tends to have greater input into its elementary and secondary systems than its postsecondary institutions.

4. Engage in consortial activity, which can reap savings in areas such as insurance.

Private colleges in Oregon and Florida have formed insurance consortia, in which

each state association of independent colleges practices self-insurance. This approach has formidable startup costs, but yields savings in administrative costs (June, 2003; Pulley, 2006). The Indiana University System has utilized an insurance cooperative to provide economy of scale in medical malpractice, property, general liability, vehicle, and directors' insurance (June, 2006).

1. Recognize the relationship between cost and price, and address rising tuition internally before tuition increases are further attacked externally.

Higher education can learn from the experience of health care providers (Langfitt, 1990). The cost and price structure in health care organizations has endured great scrutiny. In response to public criticism of rising health care costs and in order to standardize the reimbursement process, the identification of diagnosis related groups has been established in the last 25 years. These groups, roughly 500 in number, set parameters for cost and reimbursement according to the nature of the patient's illness.

For higher education, a comparable system might not be far away. Until recent years, the nexus between cost and price in higher education instruction was ill-defined. Cost exceeded price, i.e., tuition, with the difference covered by some subvention such as state appropriation or philanthropy. Below the surface lay the mysteries of vast cost differences between programs requiring extensive technology and instrumentation and those with low-cost instruction (Dempsey, 1997). Tuition tended to be rather uniform across programs, but breaks in that pattern have been observed with technology fees charged to students and more recently the beginning of differential tuition among programs.

Not only is there sentiment for greater transparency between cost and price, but public attention to price trends has also been mounting. As tuition increases peaked in 2003, U.S. Rep. Howard P. McKeon (R-Calif.) introduced legislation that would have penalized institutions for tuition increases in excess of twice the federal inflation rate. Although the bill did not pass, a new wave of large tuition increases might not escape Congressional action.

Beneath these overarching principles of understanding the cost of programs and addressing internally the increase in prices, several supporting approaches are offered.

2. Limit undersubscribed classes.

It has not been uncommon for large universities to operate undergraduate programs in a pyramidal structure. Accordingly, entry level courses are taught in very large sections, while upper level course enrollments sometimes fall to single digits. As with administrative costs, consortial activity can yield savings in instructional costs. Multiple colleges can put on a class which, if held by an individual institution, would be undersubscribed.

Lower enrollments in the major or concentration area are sometimes unavoidable, but consistent small enrollments in a discipline speak to another issue in American higher education: the notion that each institution should offer a wide variety of undergraduate majors. This approach contrasts with the European system, in which institutions maintain different curricular foci, carving out one or two areas of specialization. The influence of a central ministry of education, not present in the American system, often compels this selective excellence. In the absence of macro or national control state governing boards might move their institutions closer to this model and away from the ambitious philosophy that has prevailed in many American public universities. Action by individual institutions and a spirit of cooperation, rather than competition, among the institutions of a state, could eliminate the need for state action and help to achieve cost control.

3. Leverage technology (distance learning does not always equal lower quality).

Efforts to deliver instruction through distance modes inevitably meet with criticism from faculty, who question the quality of teaching and learning. Although these questions reflect good intentions and a recognition of the evidence supporting a traditional learning community, concerns over the quality of distance education also might be a projection of faculty preferences. If student learning is the goal of instruction, the faculty should accept the fundamental change in students, whose learning, future employment, and indeed lives, are connected to technology as never before. The learning communities of the future are likely to be in cyberspace, notwithstanding the romantic vision of the professorate.

The physical campus is an ideal, but an extensive physical campus might be an expensive reality for some institutions in the future. The first foothold for distance education has been in graduate study of business and of education, as mature adults have pursued advanced degrees in a convenient manner. How far the dominoes fall toward undergraduate education, until now conducted largely on residential campuses, is difficult to predict. However, perceptions of quality are subject to change and the cost savings of distance education are unlikely to change.

4. Limit remediation.

Total quality management calls for reduction of defects in the product (Webley and Cartwright, 1996). At first blush, it seems heartless to apply this management principle to instruction. However, the costs of remediation in American higher education are substantial. Conley (2005) asserted that a better alignment of high school with college should position students to succeed in higher education. In light of this, perhaps remediation can be reconceptualized. Preparatory education may be viewed as a kind of preventive medicine, while the pedagogical treatment of remediation can still be provided for those students who need it.

5. Justify research.

The University of Phoenix reaps savings from zero commitment to research. The faculty of the university is characterized as professional, rather than academic. Members of the faculty are generally practitioners, whose presence creates networking opportunities for their students. Faculty efforts are focused on teaching and advising. The university neither expects nor supports faculty research (Raphael and Tobias, 1997). It is not suggested that institutions adopt the Phoenix model, but rather learn from it. Without question, teaching and research are inextricably related, especially at research institutions with extensive doctoral study. However, universities should rigorously review time consumed by research, internal spending on research, and the relationship to research productivity.

6. Athletic Costs

Justify the competitive level of the institution. Very few universities break even, let alone make a profit, on athletics. While basketball yields a positive margin for many NCAA Division I institutions, it is far more difficult to achieve financial success in football. Football carries high fixed costs, such as stadium, coaching staff, and scholarships. Consequently, a high volume of attendance and donations is necessary to break even or to make a profit.

Compliance with Title IX has proved especially problematic. Most institutions have sought the safe harbor of substantial proportionality, which requires that the level of athletic participation by women closely approximates the percentage of female enrollment.

Accordingly, the most common institutional response has been to drop men's teams that do not generate revenue (Suggs, 2003) and to maximize revenue from football and men's basketball. By contrast, a few wealthy athletic programs have purchased gender equity by expanding programs for women, an alternative path to compliance.

As noted previously, Georgia Tech implemented responsibility center management in its athletic program. Athletic department officials insisted that this profit center approach to each sport was not initiated to stigmatize sports that lost money, but to ascertain the subsidies needed for certain sports and to encourage entrepreneurial behavior among coaches (Strupeck, Milani, and Murphy, 1993). The University of Virginia stratified and prioritized its athletic programs into four tiers. The first tier, comprised of football and men's and women's basketball, is expected to compete for national championships. A second tier, including lacrosse, receives nearly as much institutional support. All women's teams not in the first two tiers constitute tier three, while the fourth tier includes all remaining men's teams (Suggs, 2001).

Notwithstanding these sound management practices, the mentality of many institutions is that of an arms race. Cognizant of this, the NCAA in January 2005 formed a panel of college presidents to address the rising costs of intercollegiate athletics. To control costs, institutions should evaluate critically their competitive level and, when necessary, drop into a lower division.

American higher education always has struggled to find a balance between its ideals and reality. Zemsky, Wegner and Massy (2005) recently revisited the wisdom of Clark Kerr, who "described the tension between the acropolis, with its focus on values and mission, and the agora, the Greek word for marketplace" (p. B6). Kerr emphasized the power of the market:

"The cherished academic view that higher education started out on the acropolis and was desecrated by descent into the agora led by ungodly commercial interests and scheming public officials and venal academic leaders is just not true. If anything, higher education started in the agora, the market, at the bottom of the hill and ascended to the acropolis at the top of the hill... (p. B6)."

Trow (1988) asserted it is precisely the attention to market that has enabled American institutions of higher education to provide greater opportunity for students than can be found in any other nation. American colleges and universities will meet the need for cost control and will continue to offer access to higher education unparalleled in the world.

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