To really understand universities, you need to understand their cost structure. And to understand their cost structure, you need to understand that unlike businesses, they keep score not by profits but by prestige, and that prestige – to the extent it does not derive from events and successes in the long-ago past – is, to a considerable extent, driven by total expenditures. Thus, to “succeed” institutions must spend as much as possible. This leads to what is known as the “revenue theory of costs” whereby universities spend all the money they raise and raise all the money they can.
Once you understand this, the easiest way for outsiders to earn money from the higher education industry becomes obvious. Don’t help institutions lower costs, don’t help them raise quality: these things are complicated and cause internal disruption. But help them raise revenue? That’s a gold mine.
If you want to think about the dawn of outsourcing in North American institutions, it came precisely in areas which required some commercial ability that institutions neither possessed nor for the most part felt a need to possess – food and drink. And so, cafeterias became outsourced in relatively short order – at many campuses anyway. Institutions put contracts for these things up for bid every few years, get paid, and are relieved of managing a whole ton of non-core staff. Big win for the institution.
Construction was always a cost, but it was not a revenue source and as such was not all that interesting. But increasingly, some construction and property management projects – known as P3s (public-private partnerships) have been turned into revenue sources through clever finances. For instance, an Australian company paid Ohio State something on the order of a half-billion dollars for the right to manage (and charge for) its 36,000 parking spaces – money that went straight into the endowment and is effectively producing an annual stream of $20 million in perpetuity. At Texas-Austin, the university put up the land for a new basketball stadium, but a private owner put up the cash: under the P3 deal, the university gets to own the building and the exclusive right to host events 60 nights a year, while the company that puts up the money gets to run the other 300 nights a year. In most P3 arrangements, institutions are getting less money in the long run than they would if they could front all the money for these things on their own, but given the difficulty in raising money for some of these projects, P3s sometimes make for an attractive alternative to borrowing the money. And of course, the developers stand to make a fair bit of cash as well.
Over the past two decades, international students have become a major source of income to universities throughout the anglosphere. But gaining the local knowledge and connections to market your institution in the more distant bits of Maharashtra or Shandong is not something every institution can manage on its own; nor can they necessarily know how to transition students with imperfect English from different secondary school systems to be ready for a North American education. Much simpler to hand that task over to specialist companies like Study Group, INTO, Navitas and IDP who can do recruitment and/or manage pathways programs. There is a fair bit of money in this: at some Australian universities where revenues from international students are approaching a billion dollars a year, fees to agents/pathways providers can be in the mid-eight figures every year. For the very biggest providers, that means big valuations: when French company Ardian bought majority control of Study Group a few months ago, the implicit valuation was about $650 million US – about five times what it was worth a decade earlier. Similarly, IDP’s share price has increased more than 4-fold since the start of 2017, and indeed doubled since this past Christmas to sit a market cap of over $3 billion US. Why? Because they help universities get richer – while taking a cut.
Maybe the most significant example of companies getting rich helping institutions get richer in North America has been the spread of Online Program Management companies like 2U and HotChalk. One of the best descriptions of this is Kevin Carey’s great longform article The Creeping Capitalist Takeover of Higher Education. But the short version is this: in the mid 2010s, universities recognized that even though online programs cost less per student, to deliver than regular programs, there was no great consumer revolt forcing them to charge lower prices (likely a part of the effect of higher education being a Veblen good – consumers conflate price with quality). This promised a huge bonanza for institutions who could enrol a lot of students quickly. But while institutions could deliver the academic material, they were not brilliant at either the design aspect or at recruiting for these new markets.
Enter the OPM companies who could do both. And because the gap between institutional program costs and the tuition students were willing to pay was so huge, there was room to pay these companies enormous sums of money and still leave the universities richer. Sometimes this resulted in ridiculous situations – such as the $100,000 plus that the University of Southern California convinced thousands of new students pay to take a two-year Masters of Social Work at the University of Southern California (a credential which, it hardly needs to be said, rarely results in lucrative pay). Once this generated a scandal, USC tried to blame it all on the dastardly OPM but no one really believes it because come on, if there is one school in the world capable of lurid self-harm through sheer cupidity, it’s USC.
At one level, all of this can seem harmless. These are win-win deals between companies and universities, and the main thing is that they extend institutional resources, which allows them to pay more for salaries, buildings, equipment, what have you. Certainly, there are trade-offs: P3s for construction usually involve higher long-run costs in return for short-run benefits; private control of pathways programs or of student residences leaves some important educational programming outside the hands of institutions; OPMs and private food services – in differing ways – depend on extracting greater-than-necessary funds from learners. Reasonable people can disagree on the usefulness of these trade-offs, and of course the devil really is in the details of each arrangement – blanket statements of support or opposition to these arrangements are hardly logical.
The key point here though is to understand that as long as higher education remains a prestige industry, as long as we equate spending with quality and as long as governments pay institutions less than they think they deserve, there will always be reasons a demand for companies to help institutions expand their budgets. This is not a market one can easily erase. The forms of partnerships may change, but the impulse is eternal.