Monday, February 22, 2010

Revenue Sharing and Support for Branch Campus Growth

I have yet to visit an institution with branch campuses where the leadership did not refer to being “one university.” Because there is so little broad public discussion about branches, it always sounds to me as if they believe there is something distinctive about being “one.”

Moreover, institutional leaders nearly always maintain what I believe is a sincere desire to see their branch campuses grow in enrollment. (I’ve seen exceptions, where the president seems embarrassed by the existence of branches, but that is rare. I believe most presidents, at least, value their branches. Provosts typically do, as well, with a larger number of exceptions, and I know there are many college deans who wish their branches would vanish.)

Despite leadership support for branches, institutional practices often block legitimate opportunities for growth. The blocks may tie to our internal political behavior, as well as to the practical reality that presidents and others find their time consumed by whatever is right in front of them. Branches, by their nature, are not the central activity of the institution, and they most certainly are not “right in front” of the main campus administration.

A major obstacle to branch campus growth, however, may lie in the way we handle revenue and expenses. It is something we’ve done decently well, in Ohio, over the years, and it took me awhile to realize that our approach is not necessarily typical.

In Ohio, each university branch has a separate line in the state budget. Until the recent economic problems, state support was reliably tied to credit hour production, whether the credit hours were earned at a community college, a university main campus, or a branch. (I realize that private institutions have a different model, but the essential principles described below can be applied at any institution.)

Although each university with branch campuses has its own practices with regard to revenue, the common model is to credit the state support and tuition generated to the branch campus. Then, the branch pays overhead for services received, back to the main campus. The implication is that money flows from the branch to the main campus. Increased revenue at the branch typically implies that the overhead paid also will increase, so there is at least this incentive at the main campus to encourage branch growth. The exact percentage of income paid as overhead varies, but 6-12% is a reasonable range, depending on exactly what services are delivered by the main campus.

At Ohio University, we send money to the main campus in three ways: through overhead, as described, through other transfers to support some specific services we agreed to over the years, and through what we call “splits.” We have several ways of paying splits, but the essential idea is to share “profits” with the academic units that house courses delivered at the branch campuses. Through splits, we are able to provide relatively modest revenue directly to academic units, giving them a bit of a slush fund that lies outside of their regular budget.

Our approach is a very direct way of demonstrating that the branch campuses are a revenue boon to the University and not a drain. Enrollment and revenue growth do not in any way take away main campus resources. Unfortunately, I realize that many of our colleagues around the country work under a much less effective model.

What I have come to understand is that many institutions have financial models that actually discourage, rather than encourage, growth in courses and programs at branch campuses. The problem often begins with how the state funds its institutions.

In some states, institutions are funded through what I’ll call “direct allocation.” That is, there is no specific relationship between enrollment and funding. Oh, the president can and will argue for more support, as enrollment grows, but that puts the cart before the horse: grow and maybe you’ll get more funding. Recently, as we’ve seen, legislatures have tended to cut funding, with the result that some institutions, in turn, have moved to reduce admissions. Not a great model for economic development in the state!

In at least some states, there may actually be a tie between enrollment and state allocations, but the allocation still is to the institution as a whole, and the total allocation available is capped. So, in an example with which I’m familiar, because the main campus is at or near its cap, further enrollment growth may not generate any additional state funds. There is no incentive to support branch enrollment, unless a change can be made to create a state allocation directly to the branch. That may be dangerous ground for the branch, however, if the main campus leadership believes such an allocation would be at its expense.

States seem to handle tuition revenue in a couple of different ways. Some states do not allow institutions to keep the revenue from tuition. Instead, it returns to state coffers. Most, it appears, do at least allow institutions to retain tuition revenue, and that, of course, is one reason tuition increases faster than inflation, given reductions in state support. If the institution retains tuition revenue, there is at least the possibility of developing business models that can support enrollment growth. In fact, because of their lower infrastructure costs, growth at branches or through online programs may be a viable alternative to growth at the main campus.

Where does all this leave branch campuses? If I were advising presidents and provosts, I’d emphasize a couple of key ideas. First, assuming the institution is not practicing responsibility centered budgeting, and main campus units receive what I call “expenditure budgets” (annual allocations that create spending targets), please do not apply this approach to branch campuses. Instead, fund them as you would an auxiliary, crediting income generated by their enrollment directly to them. Create an overhead charge that is realistic, so that money begins to flow from the branch to the main campus, instead of the other way around. As enrollment and revenue grow, the overhead paid should be yoked to that growth.

Second, if you are making what I consider to be the most elementary of mistakes, and placing some or all of the funding for branch instruction in the budgets of your academic units, stop it! The surest formula for discouraging branch growth is to deny branches the ability to develop a course schedule that meets the needs of their students, while expecting main campus chairs and deans to decide which courses are needed on both the main and branch campuses. If you reverse the flow of dollars, so that revenue flows to the main campus, then adding classes at the branches to support growth will occur more naturally. (I’m not saying the academic units shouldn’t have some level of oversight regarding branch coursework and hiring of instructors, but that the direction in which money flows will tend to drive decision making.) Developing some type of revenue sharing model, such as our splits approach, will further incentivize academic units to support increased branch enrollment.

If there is anything I’m sure of about branch campus success, it is that course schedules must be set at the branch, where there is an understanding of the local market and a deep appreciation of the outreach mission. Assuring that revenue flows from the branch campus to the main campus, rather than the other way around, is an important tool to help everyone understand the financial benefit of having branches, as well as to encourage meaningful growth in enrollment.

Friday, February 5, 2010

On Being an Entrepreneur in Higher Education

Not long ago, I was speaking with an administrator at my own university. During the conversation, this person referred to another administrator as being “very entrepreneurial,” and I was stunned. In my opinion, that administrator is far from being entrepreneurial and is missing out on outstanding opportunities to grow enrollment through new programs and strategies for delivery. To be sure, the area for which this person is responsible is growing, and there are some good things happening in the unit, but I don’t see what I’d call entrepreneurship.

Although I let the comment pass, later I started thinking about our different assessments of the same individual. I’m relatively certain that we have comparable knowledge about this person’s attitudes and behavior, and we can both see the same performance measures. So why would one of us see an entrepreneur and the other not?

I can't speak for the other person's point of view, but from my perspective, entrepreneurship is about innovation; it is not about linear improvements to an existing product. I would argue that an entrepreneur creates or takes advantage of a disruptive environment, taking calculated risks that change the competitive landscape. (See earlier posts on this blog.) One might say it is about having a future orientation, rather than a focus on the present, but that may not be entirely fair. Maybe it is more of an awareness of possibilities that are qualitatively different than what presently exists, at least within the institution.

An entrepreneurial effort in higher education implies new programs, new delivery systems, or new ways of engaging with students. Creative, strategic marketing is an important part of entrepreneurship, as well, such that prospective students begin to choose the new opportunity over previously existing options. There may also be meaningful innovations to the typical business model, perhaps affecting how the institution earns revenue or spends its money.

To illustrate, at our institution we’ve been delivering graduate cohort programs off the main campus, for decades. Our cohort programs typically are master’s degrees, offered in lockstep fashion, part time, over two years, at a branch campus or other location. Instruction is either face-to-face or through interactive television, primarily, with the same courses being offered by the same instructors as our main campus program. The programs are financially lucrative, if enrollment exceeds 20 students.

I’m pleased with these programs, and I imagine the approach was quite entrepreneurial in its time, but after 30 years, it seems like a stretch to call these cohorts entrepreneurial. Offering additional cohorts of the same or different programs may yield growth in enrollment, but they still are linear extensions of what we’ve always done. The fact that deans and chairs are eager to get on board with cohort programs these days reflects the economy and our budgets, not an entrepreneurial spirit.

On the other hand, these programs most definitely are part of a broader perspective on our commitment to entrepreneurship. Our marketing team has done some very creative and successful marketing of these programs over the past two or three years, so that the average enrollment in a cohort has gone up. They have built new relationships to help us spread the word, through what we call our Central Ohio strategy, giving Ohio University access to the Columbus metro population. (We sometimes talk about “breaking out” of our rural Southeastern Ohio region, although we remain committed to making sure that residents of our own region have access to graduate opportunities.)

The marketing efforts, in my opinion, do reflect an entrepreneurial spirit. I won’t go into details, but we’ve followed all the steps one would expect, in terms of testing and evaluating ideas, studying best practices around the country, making modest investments in new techniques to see how they go, and so on. Enrollment has grown by about 40% over the past two years.

That said, at the risk of being overly blunt, from my personal point of view, we are growing cohort programs because we can do so quickly, because many current faculty are familiar with and comfortable with that model, and because they can throw off cash to support the development of more innovative programming. I know this may sound cold, but the entrepreneurship lies in the overall strategy, not in simply growing cohort enrollment.

I believe much is at stake for higher education over the next five to ten years. It will not be an effective response to a disruptive environment to do more of what we’ve always done. It is not entrepreneurial to use interactive television to deliver the same program you’ve always delivered, with butts in seats and class minutes calculated to satisfy some bureaucratic reporting requirement. It may be a good idea to expand these programs, but there is no real innovation—no real creativity and no meaningful market positioning to respond to emerging competition.

In my opinion, there are certain keys to effective innovation in higher education. One key for the future, almost certainly, lies in developing a variety of engaged partnerships with other institutions. Successful leaders will be committed to listening to current and prospective students (nonconsumers), to employers, and to potential partners. They will take steps to co-design programs that speak to emerging needs.

We need to see delivery approaches and services that are targeted specifically to the needs of our students, not to the preferences of faculty members. We need to respect the challenges faced by students who are pursuing their educational dream, while juggling the demands of family and jobs. It is about value: An excellent program that meets students’ legitimate expectations for flexibility, support, and a price tag that they can afford.

Please do pursue creative recruiting practices and expand the programs available at branch campuses, as you can. Branch leaders know that we have to be opportunists and experts in interest-based bargaining. We have to stay patient and use language that builds support over time. But let’s not confuse that work with being innovative.

I am working on some thoughts tied to the topic of “how to think like an educational entrepreneur.” We have to do better than what I’m seeing at most institutions. One of the first steps is to recognize the difference between what we’ve always done and those creative approaches that change the game. Institutions may choose not to go this route, of course. I just believe that many of them will regret the decision.