Category: Funding and Finances

The economics of higher education are tricky.  It’s a labour-intensive industry, and generally speaking the cost of producing labour-intensive goods will always increase faster than the price of producing capital intensive goods, because the latter have more scope for increasing productivity. That’s not a problem if you are a public institution in a country with bottomless pockets, or if you are a prestigious private institution with almost unlimited ability to raise prices. If you’re among the other 99 percent of the world’s institution, though, you have to find ways to balance rising costs with new sources of income. But every money-making scheme comes with problems…and costs! So which one to choose?

Today’s guest is Joshua Travis Brown, from Johns Hopkins University’s School of Education. He’s the author of a new book called Capitalizing on College: How Higher Education went From Mission-Driven to Margin-Obsessed, which follows the fortunes of a number of institutions who try out different strategies to try to keep themselves afloat. Some try to double-down on a historic place-based residential mission and charge higher fees; others try to find ways to generate revenue that can cross-subsidize their historic place-based activities. But what’s particularly intriguing about this book is that his subject institutions are all religious institutions. Not only does that mean no core public funding: it means that decisions about how to find new business lines all really have to pass a test of God vs. Mammon.

This really is one of the best higher education books of the year and I was so pleased we could get Josh on the show.  I won’t spoil the fun any more: here’s Josh.

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The World of Higher Education Podcast
Episode 4.6 | Capitalizing on College: Mission, Money, and Survival in Higher Ed with Joshua Travis Brown

Transcript

Alex Usher (AU): Josh, your book is one of my favorite kinds of higher education books—lots of real, if disguised, institutional case studies. I get the impression that what you were trying to do was look at different financial strategies to cope with the phenomenon of ever-rising costs in higher education—Baumol’s disease, basically. How did you choose those eight institutions for your case studies? And why did you focus only on religious institutions, which I thought was a really intriguing choice?

Joshua Travis Brown (JTB): Thanks, Alex. That’s an excellent question to open with. I was looking around at the world, and a lot of what we in higher education base our norms on are the best practices maintained by elite institutions—those that accept only about five to nine percent of applicants. But then there’s the other ninety-one to ninety-five percent of institutions that don’t have those kinds of resources, and their world looks radically different.

One group I focused on are what we call tuition-driven institutions in the American sector. That’s actually a very diverse set of schools that, I’d argue, form the backbone of American higher education—at least in terms of its diversity. These include Hispanic-serving, minority-serving, HBCUs, predominantly Black, religious, women’s, Asian American, vocational, and regional colleges, among others.

Within that really rich and diverse group, the largest by far are the religious colleges and universities in the United States. There are roughly a thousand of them—Protestant, Catholic, some Buddhist, Mormon, Muslim, and Jewish institutions as well. I chose to sample primarily from the Protestant group. And the reason for that choice is that I was interested in behavior, not belief.

The perspective I argue is most valuable is one that looks at behavior that cuts across institutional types, rather than staying within silos and making what I’d call an erroneous assumption that, “This sector operates this way, and that sector operates that way.” I argue instead that everyone is in competition with one another—and to truly understand the sector, you have to look at behavior across all types.

AU: Based on your work at these institutions, you developed a four-part typology with four types of institutions. You call them those following a Traditional Strategy, a Pioneer Strategy, a Network Strategy, and an Accelerated Strategy. How did you come up with those four? Were they in the back of your mind when you selected the cases, or did they emerge organically from the research?

JTB: This is purely grounded theory—straight from the data. What I’m arguing here is that I’m looking within what I call the “missing middle.”

A lot of higher education research tends to focus on what I call the bookends—students on one end, and government or the state on the other. But we don’t do a great job, as researchers, of really diving in to hear the voices of those actually running and leading the institutions.

So as I started to look at the data, pull out themes, and group them into buckets, these four strategies emerged. There was even a fifth one beginning to appear, which I called Accelerated Networks—where the accelerated institution was trying to crack the code to move to the next level of market-oriented behavior. So yes, they surfaced organically from the research.

AU: Let’s talk about that Traditional Strategy. What does it entail? What kind of resources does it take to implement? And how easy is it to, you know, for lack of a better word, win using this strategy?

JTB: The Traditional Strategy is your typical higher education institution that values prestige. They’re constantly looking to the elites.

There’s a whole sector of “little Ivys,” “public Ivys,” and “mini Ivys” that sit just below the Ivy League institutions, and they’re really trying to leap forward into that group. These institutions not only value prestige, but they also operate under the assumption of an in-person education. As one president told me, “You come to a tradition.” He repeated that phrase several times. These institutions rely heavily on building their brand, climbing the rankings, ensuring their athletics are top-notch, and gaining national exposure through sports. They want to become household names.

The problem for traditional institutions—and really, for all institutions—is that the residential, on-campus, in-person model of higher education in the United States operates at a deficit. It must be subsidized.

For the traditional institutions, that subsidy comes primarily from endowments—the spinoff revenue that supports the residential model. And the key takeaway from the book, across all these strategies, is that everyone is trying to subsidize the residential core. What differs is how they do it.

The traditional model depends on philanthropists, wealthy donors, and the prestige that fills their sails. They can call on endowments of two, three, four, five, six, even eight hundred million dollars—and the revenues those spin off—to make their operations sustainable. Or at least, so they think.

AU: Tell us about the second strategy then. You’ve got a Pioneer Strategy. What does that mean—and where do those subsidies come from, if we can put it that way?

JTB: From this point forward in the book, everything turns entrepreneurial. These institutions no longer look to endowments—because they don’t have them. So, for the next six schools in the book, every president is basically saying, “I don’t have an endowment. I need to find margins—and I need to find them somewhere.”

And what they do is turn to students. That’s where they find their margins.

In the Traditional Strategy, as I mentioned earlier, the assumption was that you come to the institution for the tradition—to receive it, to be inculcated into it. The Pioneer Strategy turns that idea on its head. These institutions ask, what if we took the classroom to the students?

That’s the innovation here. Every one of the next strategies has some kind of innovation at its core. In many ways, this book is a story—or a playbook—of innovation. That’s what I hope readers take away: not just the strategies, but the innovative practices themselves.

So, these institutions took classrooms to hotels. They took classrooms to schools and high schools, to shopping malls, to military bases. They went to where the customer was. The classroom became reconceived—portable. And they picked a type.

I take readers through three different types in that chapter, and then show how they replicate it. Whatever region they’re in, what you end up seeing is a giant branch campus model built around that one specific type.

You’ve got multiple sites, but all following the same formula. And all of the revenue—say, a 20% profit margin—from those branch campuses flows back to the core institution. That’s how they rebuild the core.

Over the course of a decade, they can raise anywhere from two hundred to five hundred million dollars—and they use that money to physically transform and rebuild the residential campus.

AU: But all those markets you’re talking about—it’s really just mature students, right? Are there other pioneer markets you can go to besides mature students?

JTB: The principle here is that these institutions were first movers. They were the first movers in adult education at the time.

For readers today—if I’m a leader picking up this book and asking, “What’s the takeaway here?”—I’d say: think badgification, think microcredentials. Think of some new market that’s just about to spin off or is moments away from being spun off.

Anyone who goes all in on that kind of emerging market would be a pioneer institution. They’d be adopting the Pioneer Strategy for that new market—just as these institutions did about a decade ago.

AU: Does it work? I mean, it takes money to make money, right? You’ve got to rent the hotel rooms, pay the professor to go there and teach. It sounds like you have to be extremely margin-conscious—and at a certain point, it’s easy to overshoot, to overcommit to these kinds of things. So how many of the institutions you looked at actually managed to reinforce the residential core?

JTB: They did—but by the time I arrived on campus, the folks in the Traditional bucket were saying, “Oh my gosh, we need a new strategy.”

Meanwhile, the folks at the Pioneer institutions were saying, “Hey, this has worked for about five to seven years, but the competition is so intense it’s eating into our margins. Other institutions are moving into our space. It’s getting really hard to recruit. We need to add a new market.”

And that’s the principle behind the Network Strategy. Rather than having one type, they add multiple types. That’s the big difference between the two: the Pioneer Strategy has one type with multiple sites, while the Network Strategy has multiple types, multiple sites—and it’s global.

AU: Let’s talk now about that Network Strategy. Just as you were finishing there, I think you were saying the difference between the Pioneer and Network strategies is how many new markets you go after. Is it more than that, or is that really the key distinction between the two?

JTB: No, that’s the big difference—because again, what we’re really trying to figure out here is: how are you subsidizing your residential model? It never makes enough money on its own. So where are you finding those margins? And those margins always come from the periphery.

For the Network Strategy, one of the presidents I interviewed described what he called his tabletop strategy for running the institution. He said, “The residential core is the tabletop. All of my peripheral markets—whether online, international, transfer, or adult education—those are the legs. And I’m constantly looking for new legs, new sources of revenue, to support this tabletop.” He went on to say that the tabletop—the residential core—is what gives legitimacy to the entire model. You can’t do this without the tabletop.

And that’s the key difference between the Network Strategy and something like the University of Phoenix. Phoenix was essentially one giant leg. What they lacked—and what people criticized them for—was legitimacy. They didn’t look like a traditional college, and they weren’t serving typical students.

That’s why this book and this perspective are so valuable: when nonprofit institutions start going after the same students or adopting some of the same practices as for-profit institutions like Phoenix, the lines begin to blur. To really understand what’s happening, you have to look across types and sectors—and focus strategically on the behavior itself.

AU: Is that an easier strategy to pull off than the Pioneer one? I mean, it sounds harder to me—but it might also have bigger rewards, since it spreads the risk across different types of markets.

JTB: That’s absolutely key, Alex. One of the presidents I interviewed put it exactly that way. He said, “I’m trying to build a stock portfolio of enrollment. If one sector goes down, I still have another three or four sectors over here, so a drop in one leg isn’t going to sink the ship.” What they were striving for was balance. But both institutions, in their enthusiasm for adding new legs, made a critical mistake—they actually ended up creating a second tabletop.

They either absorbed another institution or built a massive campus overseas—in one case, in Asia. And instead of funneling all of their margins back to the residential core, they had to start directing them to these peripheries, to that second tabletop.

It became really complex. Morale declined. And by the time I arrived on campus, they were looking for a new kind of market—something they could take to scale. And that’s what the next school managed to crack.

AU: Let’s talk about that last strategy—the one you call the Accelerated Strategy. It’s an amazing case study, especially because it’s a religious institution. As you put it, it’s where God and Mammon really start to duke it out.

This is an institution that seems to have crossed the line from being merely margin-conscious to acting like a full-on for-profit college. And that’s wild for a faith-based organization. Tell us about this institution—and how going down this route changes a university.

JTB: You know, what’s crazy is that I changed all the names of the actual schools in the book—but when a school named its competitors, I left those in.

So as I’m interviewing the leaders at the accelerated institution, they’re saying, “Hey, we’re like ASU. We’re like Penn State. We’re like the Maryland system. We’re like Western Governors, UCF, Florida, Southern New Hampshire University.” And they viewed that entire group of schools as their competitors. The way they took their model to scale was through process and product innovation.

I was sitting across from the provost, and he told me, “I had a vision. I pictured an old country store. Down one side of the store was one product, and down the other side was another product—and that’s all we had to sell.” Those two products were an MBA and an interdisciplinary studies degree. At that time, if you wanted to earn a degree online from this institution, those were your only two options. But then he had this transformative idea. Over the course of a single summer, he took roughly 35 to 80 residential courses and converted them for online delivery. Within three to six months, that old store suddenly had 35 different products on the shelves.

And here’s the key innovation: everyone else at the time was selling online classes. This institution became one of the first—outside of Phoenix—to sell online degrees. They fundamentally shifted the product, and that move blew up their market. Virtually overnight, they went from 8% to 42% growth.

AU: Wow. But surely it changed the culture of the campus?

JTB: It did. People talked about the tension between the residential and online sides of the institution. The student population ballooned so dramatically that it went from being majority residential to, essentially, for every ten online students, there was one residential student. It radically transformed the institution. They were able to hold costs flat.

Now, the other entrepreneurial schools I studied were funneling their margins back into overhauling the residential campus. That’s what I call margin capitalization. Instead of looking for donors or venture capitalists, they turned to students.

This particular school made so much money—just north of two hundred million dollars a year—that they were not only able to completely rebuild their campus, but also to put hundreds of millions into their endowment.

What this institution effectively invented is a new form of philanthropy that I call margin philanthropy. Instead of relying on alumni—graduates who go out into the world and eventually give back—you’re leveraging the loans of students who are currently enrolled. They become your new philanthropists.

The risk of construction and the growth of the endowment aren’t borne by the institution anymore; they’re borne by the students themselves—who walk away with a degree in one hand and a student loan, anywhere from fifty to a hundred thousand dollars, in the other.

AU: The problem of ever-rising costs—Baumol’s disease, basically—is one that plagues every educational institution. Only by spending more money every year can you hope to stay in place. But achieving that means raising more money every year.

And I read your book as being fairly pessimistic about any institution’s ability to sustain that in the long run. Right? You can have all the strategies you want to increase revenue, but they all require hiring more staff, becoming more complicated—and then Baumol just reappears further down the line. Is that a fair summation? Do you think one of these strategies is actually more promising than the others? Or does Baumol’s law come for all of us eventually, no matter what?

JTB: I think one of the big takeaways from the book is that this sector is constantly marching upward in its market behavior.

When I arrived on these campuses, everyone was saying, “We’ve got to sustain. We need more. We need more revenue. We need more margins.”

Now, while Baumol, as an economist, has one way of looking at the world, I don’t think it’s entirely accurate. He was, after all, an economist from several generations ago. What’s spun out of economics since then is the field of strategy and management, which focuses more on the agency of actors within organizations.

Those working in strategy and management began to explore that agency—to explain the world in a more nuanced way. And that’s where this book differs from Baumol’s framework: it’s grounded in organizational theory, strategy, and management.

What you end up seeing—and what the book focuses on—is this: we often hear about public policies, particularly from the Federal Reserve in the U.S., that are based on the idea that if you increase competition and give students choice, the natural outcome will be higher quality. As institutions compete, quality should improve—at least in theory.

But what this book shows is that when you incentivize students to be more self-interested and to make market-based choices, you also incentivize institutions to be more self-interested.

That’s why we see institutions going after student loans and seeking margins from students—they’re also operating in a highly competitive market.

So, what this book illustrates are the trade-offs between mission and money that college leaders are forced to make when we choose to design a national education system based on market principles of competition. And that, I’d contend, is a challenge much bigger than Baumol himself.

AU: You’ve focused obviously on one group, the non–research-intensive private institutions, and a particular sub-sector within that. How much can you generalize from this book to other types of institutions—secular ones or public ones?

JTB: That’s a great question. The reason I narrowed the focus so tightly is that, in case studies, what you want to do is control for noise. So rather than mixing all types of tuition-driven institutions together, I chose one type and looked at the behavior across those cases.

But I would contend that because I’m really examining a single phenomenon—tuition—and specifically two questions: how do students get their money, and what do institutions do with it?—this framework is broadly applicable. And honestly, in the last six months especially, I think everyone is becoming tuition-driven.

We’re seeing decreases in research funding revenues, decreases in endowment revenues because of higher taxes. This morning’s headline from the Secretary of Commerce said they want to go after 50% of all patent revenue. And just yesterday, it was announced that all MSI funding would be decreased. The only stable thing left is tuition revenue.

What Capitalizing on College offers is a roadmap for how these institutions managed to survive in a highly competitive environment—and now everyone is entering that same space. So yes, I believe it’s highly generalizable, because this is the roadmap forward. This is the environment we’re heading into.

AU: Joshua Travis Brown, thank you so much for joining us today.

JTB: Thanks. A pleasure being here.

AU: And that just leaves me to thank our excellent producers, Sam Pufek and Tiffany MacLennan—and of course, you, our listeners and readers, for joining us.

If you have any comments or questions about today’s podcast, or suggestions for future episodes, please don’t hesitate to get in touch at [email protected].

Join us next week when our guest will be Luiz Augusto Campos, professor of sociology and political science at the Instituto de Estudos Sociais e Políticos at the State University of Rio de Janeiro. He’s the co-author of a new book on the effects of racial quotas in Brazilian universities. Join us next week. Bye for now.

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