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    The Business of Universities

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

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

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

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

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

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

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


    I don't think that the word "business" means what you think it means. An organization that lives off donations is not a business, it's a foundation. The most successful foundations are not those that do the best work but those that raise the most money. Nonetheless, I find your core position that top universities' core customers are alumni to be profound and insightful. My preppie liberal arts college tracks me wherever I go and arranges for friends of mine to call me up and ask for donations. (By contrast, I also studied in the UK, but my government-funded British university only sent lame donation requests and long ago lost track of me completely.)

    Your argument also answers a question that has been bugging me--why does my alma mater relentlessly upgrade facilities that don't require upgrading. I'm sure that the new library will be nicer than the old library, but the old library is only 40 years old. Does it really have to be replaced already? I figured that the college just had too much money on its hands, but your post adds some complexity to that thought. The colleges and universities are competing for the top students in order to cultivate the top alumni donors. In order to compete, they need "state of the art" facilities to demonstrate how superior they are.

    The result, unfortunately, are luxurious but inefficient institutions caught in a never-ending race to be more luxurious than the competition.

    PS Needless to say, I'm not a very desirable alum.

    I second Genghis' comments that the alumni-as-customers is a very insightful way of thinking about the University business-model (or foundation-model, whatever). It does explain the presence of "weed out" courses at the Freshman (or "First year" if you're at UVA) level in universities. They don't want to waste time on students who won't be successful alumni.

    That said, I think you're glossing over something mighty big when you choose to ignore research grants as customers. Much of the dissatisfaction with Universities is with how professors favor research over teaching. Of course, I know you know this. Perhaps you weren't glossing over it because you felt it was unimportant but because you realize it's obvious and wanted to tackle the less obvious (to many of us) emphasis on pleasing alumni.

    Yeah, Nebbie, it's true. But I was leaving the knowledge economy and the relative emphasis on teaching and research for other posts.

    Well, okay, Genghis, I glossed over the business/foundation distinction, mostly for rhetorical purposes. But thanks for dealing with my larger point, than even a non-profit foundation has economically rational behavior. And I would say that this goes on most levels, although I chose the Ivies as an illustration.

    As for building booms: it's true it's part of a competition for the best students. But it's also part of the logic of being an administrator. Upgrading the campus is something that's easier for administrators to control, and easier for them to take credit for, than a series of small improvements inside the classroom. What goes on inside classrooms can only be influenced indirectly, with pretty blunt instruments, and if somehow a university president managed to get 15% better teaching out of the whole faculty, it would be hard for people to see exactly how s/he contributed to that.

    @Nebbie- I agree, but actually at most places washout courses are discipline-specific. Princeton isn't interested in washing any of their new undergraduates out of college; they spent too much time and money admitting the class, and the insanely difficult admissions process at elite places means that the students come, er, pre-washed. But they are interested in washing them out of certain fields; if someone thinks s/he wants to be an engineer, but doesn't want to put in the work, the sooner they figure that out the better.  Students don't get washed out of the humanities or social sciences, usually. because a lot of those students can be trusted to switch to something more lucrative somewhere down the line. (If most of your anthropology students end up lawyers or TV execs, that's fine.)

    But the elite places also sometimes put up a high bar for arts classes. A friend of mine who used to teach creative writing at an Ivy-league school was recently talking about how students had to apply for fiction-writing classes. He and a colleague would get 400 applications a semester, with writing samples, for 60 places. My friend found this shocking and joyless, and was startled that his students treated the process as completely normal. And I heard what my friend was saying, but I also thought: that school wants its students to know how hard it is to be a writer. They're interested in sorting out the future writers who are willing to work hard and compete and audition from the people who would like to be writers but won't hang in there when it gets tough.

    I agree, but actually at most places washout courses are discipline-specific. Princeton isn't interested in washing any of their new undergraduates out of college; they spent too much time and money admitting the class, and the insanely difficult admissions process at elite places means that the students come, er, pre-washed. But they are interested in washing them out of certain fields; if someone thinks s/he wants to be an engineer, but doesn't want to put in the work, the sooner they figure that out the better.

    At Georgia Tech (my undergraduate school), there weren't too many disciplines you could switch to if you decided you weren't cut out to be an engineer. At least, not too many disciplines you could switch to that were signficantly less rigorous. There was the exception, however—Management and Management "Science". Switching to one of those majors was known as "taking the M-train". (We had a lot of fun names for various disciplines: IE, or industrial engineering, was known as imaginary engineering as it had very little to do with what most would consider actual engineering; Architecture was known as Architorture, for obvious reasons.)

    P.S. What's your discipline anyway? I hope I'm not stomping on any toes! (I still remember my dad telling me about agricultural engineering, which I then made fun of before he had a chance to tell me that was his undergraduate major! I'm a little too quick with a joke sometimes.)

    I'm a humanities guy, Nebbie. The only math I did in college involved iambic pentameter. So joke all you want; I'm at peace with it.

    And yeah, Georgia Tech, like other A-list technical schools, doesn't fit my model because you can't switch to majoring in history. But Georgia Tech has already pre-sorted its students through its admissions process, so everybody has the same core skill set. I was thinking of schools where you've got a range of majors and a range of students with different aptitudes; in that environment, you don't want to wash kids out, so much as to nudge them toward something that's a better fit. (And now that I think of it, I can recall one person who was told, at an Ivy League college, that he shouldn't major in English because he was probably better at other things.)

    Things have changed a bit at Georgia Tech since I was an undergraduate (these were the times before US News & World Reports created their coveted rankings which factored in such things as graduation rates), but I still remember this speech at orientation:

    Only about a third of our incoming students graduate from here. So, look to your left. Look to your right. If one of them graduates, you won't.

    I feel sorry for those two people… Laughing

    Excellent piece. I especially like your suggested advertising slogan: "Princeton: Where We Disabuse You of Your Less Realistic Dreams." It might work as an actual ad (assuming that Princeton does need to adverise).

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