The higher ed sector has been relatively immune (or perhaps resistant?) to change since its inception, but in the past 10-15 years, and especially since the Great Recession, multiple things have changed, forcing changes on it. We now are seeing market forces unleashed, including consolidation, mergers/acquisitions, and closures as we’ve rarely seen before (and not in my lifetime).

Understanding Higher Ed’s Situation

To put what is happening in higher ed in perspective, we examine the higher ed marketplace through the lens of the product lifecycle (PLC). This is a tool marketing applies to products, but it also is relevant when examining market segments or industries.

The PLC is made up of four stages: introduction, growth, maturity, and decline.

  • The introduction stage is characterized by the organization building brand awareness;
  • The growth stage is characterized by strong growth, and the organization building brand preference and increasing market share;
  • The maturity stage is characterized by strong growth diminishing as “competition” rise and competitors offer similar “products.” This results in multiple possible marketing strategies including cutting prices, rethinking positioning and branding, and market consolidation; and
  • The decline stage is characterized by sales significantly declining or having declined. In many cases, the product (or business) goes out of business or, as a last result, finds an acquirer (merger or acquisition).

Higher ed finds itself in the maturity to declining stages as characterized by declining enrollments, lack of differentiation in the higher ed marketplace, and an increase in market consolidation (M&A activity) and/or college closings.

There are many reasons why higher ed finds itself in this situation.

First, higher ed enrollment has decreased for a myriad of factors, not the least of which is changing demographics, i.e., the numbers of the “traditional” college age student has decreased.  Compounding this decrease, higher ed is becoming perceived as elitist, and many cannot afford its cost and/or the resultant student debt.  In other words, institutions are competing for a shrinking pool of students, and it costs more for an education that some feel isn’t worth the money spent or debt incurred.

Second, there is an overabundance of education institutions – too many colleges and universities, and, with rare exceptions, they are offering the same types of programs, e.g., how many MBA programs do we need???  This has resulted in significant economic pressure on those small- to medium-sized colleges and universities who have a relatively small (or no) endowment. This pressure is compounded by cost curves that have been carved into stone over the last several decades.

This is played out by larger institutions undercutting smaller institutions on price.  For example, the president of the University of Virginia recently announced that tuition will be free for families earning less than $80,000 a year, and if they earn less than $30,000 a year, they will get room and board. In another example, New York University is not charging their medical school students any tuition. Both of these institutions have large endowments to be able to do this, but how can the small- to mid-sized institutions compete?

Lastly, there is pressure for the nonprofit higher ed sector to figure out what to do about the out-of-favor for-profit institutions.

These three reasons, aside from the fact that there are market dynamics at play – there is more supply than demand – are driving many of the changes we’re seeing right now in higher ed.

Mature and Declining Markets Give Rise to M&A Activity

Some smaller colleges and universities under financial stress are looking for ways to solve their problems, and one way is merging with or being merged into another institution.

The for-profit sector is a great example of where there has been significant M&A activity, e.g., Purdue and Kaplan forming Purdue Global, Strayer acquiring Capella, etc., as for-profits figure out their future when nonprofits are clearly in favor (and for-profits are clearly out-of-favor). This not completely changed, even with the change in administration.

Mergers aren’t the only solution for this problem. Many for-profits are attempting the transition to nonprofit status, e.g., Grand Canyon University and University of Phoenix. However, this isn’t always the easiest thing to do because of the regulatory permissions required from the Dept of Education and the institution’s accreditation body. Additionally, it doesn’t solve their perception problems, at least immediately.

Multiple Reasons for M&A Activity

There are multiple reasons for increased M&A activity in the higher ed sector besides market forces at work, and we need to look at the reasons why M&A activity occurs.  Basically, there are three main reasons:

  • New markets / customers
  • New technologies
  • Gain efficiencies in operations

National University System is a good example of this – they’re on a buying spree and for all the right reasons.

The National University System, a not-for-profit, currently has three nonprofit institutions under its umbrella: National University, the original mothership; JFK University in northern California, and City University of Seattle, but over the past year, it has acquired Patten University for its technology and Northcentral University for its students and programs.

M&A for New Technologies. In its acquisition of Patten University, NU acquired one of the best LMS systems in the marketplace. The system, which was called University Now, has been renamed Flex Course, and NU has adapted it for their own use. As part of the acquisition, National also acquired Patten’s courses which were heavily competency-based. This is also a good advantage in that they have been able to teach out the Patten programs and integrate the learnings into their current undergraduate programs.

One thing that was critical in the acquisition was the ability to modify the LMS to ensure NU was able to continue to satisfy Title IV funding requirements which are driven by Carnegie units. Again, due diligence was critical in this respect. The technology was relatively new, and therefore it was easier to adapt it to satisfy Title IV funding requirements when doing CBE.

Ultimately, NU has great hopes that this acquisition will help them to transform the online learning experience at all its universities.

In other words, National did a great job in completing its due diligence.

M&A as a Growth Strategy. There’s two ways that institution grow. One is through organic growth, i.e., you decide you will move into the online sector and you build your program from scratch. Many institutions have done this, and the most recent (and possibly the most famous) of these is the announced online undergraduate program at the University of Pennsylvania, the first of the Ivy League institutions to go online with a program.

The second strategy is acquisition, which is how the National University System is expanding their doctoral offerings. NU acquired Northcentral University (pending appropriate WSCUC and DOE approvals), an online for-profit university that offers mostly graduate education programs at the master and doctoral levels. This fills a gap that NU had at the doctoral level, and adds to its ability to offer online and blended courses.

National is already predominantly online – 51 percent of its students are in synchronous or asynchronous online programs – but its acquisition of Northcentral was critical in three ways.

  • First, Northcentral is completely online and has 24 programs, the majority of which are doctoral, an area NU wanted to expand its offerings.
  • Second, the Northcentral faculty are high quality and located in nearly all of the 50 states. The model that they use is one-on-one similar to the Oxford Tutorial Model, which having your faculty are distributed across the country is an advantage when using this pedagogy.
  • Lastly, National acquires a pretty efficient OPM support back-office.

As far as the culture goes, NU expects they will get some real experience bringing the for-profit Northcentral University into the NU System and converting it to a not-for-profit.

National’s acquisitions have been very strategic in nature – they have looked at multiple opportunities and walked away from many. With these two, they’ve made good choices in line with their overall strategic plan, and done the due diligence to ensure they are picking the right horse.

Remember that Culture Issue We Had…

Culture is critical when considering a merger. Years ago, when HP acquired Compaq, it was the culture differences that most impacted the success (or lack thereof) of the merger.

The Purdue Global situation is a good example of the challenges merger entities can face. Purdue “bought” Kaplan, i.e., Purdue got franchise of the online courseware from the Kaplan organization, while Kaplan retained the back-office processing and support, and the OPM.  Kaplan’s portion of the entity, still for-profit, is being paid for by the profits they’re going to make, while the courses are offered through the not-for-profit Purdue Global.

Many consider the merger between Purdue, a Tier 1 research university with a very high reputation and traditional faculty, and Kaplan, a good institution in its own right but a for-profit online, a very gutsy move – especially when one considers the faculty culture aspects.

Why is there resistance to this change is relatively simple to understand. Culture.

The integration of cultures is never easy.  Sometimes, when two cultures come together as Purdue and Kaplan are attempting to do, they merge like oil and water. And that’s one of the most important things that folks doing mergers and acquisitions must think about – how the cultures align – because more than anything else, it is culture that can destroy a merger and eliminate the efficiencies that the merger is designed to take advantage of.

Take for instance the merger of Kaplan and Purdue. Kaplan, a for-profit, and Purdue, a R1 university, are very different cultures, especially when it comes to faculty.  Regardless of the high quality of Kaplan, an institution which has stayed pretty much out of trouble in terms of the scrutiny of the for-profit community, Kaplan’s online degree programs themselves are a challenge to Purdue’s “in classroom” campus programs that a R1 institutions are experienced in providing.

Faculty, and especially traditional, research faculty, generally tend not to like a lot of change, nor are they wild about online education. And we can just image what a traditional, research faculty such as Purdue’s felt about merging with a for-profit online institution. From all reports, faculty was furious when the merger was first announced – their “brand” was being diluted by this incorporated new global entity called Purdue Global that included a for-profit institution.

The merger has progressed, and faculty and administration appear to have come to a truce, at least for now. That said, Purdue is spending significantly to market Purdue Global – it is in almost every market with TV and radio ads – while trying to keep marketing positioning separate between Purdue and Purdue Global.  It has yet to be seen as to whether they are able to keep their faculty happy about it or the branding separate, but that’s a whole different kettle of fish.

The Future of the For-Profit Sector

The for-profit sector is not going to disappear, as much as much of higher ed would like it to. However, there are market forces at play here too, and the for-profit sector may morph its way towards a higher concentration of those who survived being distributors of OPM or programs.

An example of this is MOOCs.  When you look at several of the MOOC organizations, e.g., Udacity, EDX, etc., these organizations are not just providing learning experiences, they are turning into distributors of traditional degree programs, including even graduate programs for R1 universities. This, plus being obvious merger targets, will continue the upheaval in this sector.

We believe that we will see more mergers and less of the organic growth from for-profits, including for-profits becoming part of nonprofits similar to what is happened with Purdue Global, as well as mergers to share back office services. One example of this is TCS Education System, who provides back-office services for a number of institutions. These types of mergers could have a major impact in the online space, especially for small to medium-sized institutions, as it is almost impossible for them to establish the infrastructure to do an effective job in online education – the only way for them to get and/or stay competitive in the online space is to “outsource” back-office functionality.

Federal Funding and Accreditation

There are also a number of changes in regulatory and accreditation factors between Obama and the Trump administrations that are impacting higher ed.

Federal Funding. In a recent talk given by Secretary DeVos, her current position is focused not on the change in the standards but rather more on making Title IV funds available for a broader variety of learning experiences. She conveyed a pretty strong feeling that we should not be committing all postsecondary education funding to what we now call hire traditional higher ed, but to improve the flow of federal funds to retraining programs.

Accreditation. There are not a lot of people who believe that we will move dramatically away from the kind of accreditation process we currently have for a myriad of reasons, despite the upcoming Neg Reg process which begins in early 2019 focusing on accreditation and innovation.

Big changes from in accreditation will need to include a willingness to think in competency-based terms. This will require a major shift away from the strict Carnegie method of determining learning, to more of a competency-based approach to assessing learning outcomes.

Simply put, it is much more important to know that people are learning and being able to demonstrate learning outcomes than it is to demonstrate how long they sat in a seat. However, changing this mindset will be very challenging as it has been this way for well over 100 years.

Additionally, those with marketing backgrounds know that accreditation is the university system’s greatest barrier to entry. It is important that universities meet a quality level, but the current system requires institutions develop prima facie evidence of quality, and many potential competitors get frustrated before they get accredited. This could be one reason why the accreditation system as we currently know it does not (and will not) change.

Three Things University Presidents Should Consider Before Merger

If you are considering merging with another institution, there are three things you should consider.

First, culture. You must examine the cultures of the two organizations to ensure that they are mergeable, i.e., that the two cultures are not contrary to one another. There are clear differences between for-profit and not-for-profit cultures, and you must “test the water” and see just how much of a business the for-profit institution sees themselves as vs. it being a learning institution.

Second, regardless as to whether it is a for-profit or not-for-profit entity, does the acquired institution have the programs, faculty and administrative support that is consistent and that will integrate effectively with your own. This is critical, but especially critical with respect to faculty. Faculty generate and own the content, and it is essential you have a group who can drive the learning experience for students. That’s not something that you can import easily – you must make sure that it fits your own model about how it’s going to work.

Thirdly, you have to look at the institution as a business. You (obviously) don’t want to take on something that is so broken that it cannot be fixed no matter how hard you try. For example, you have to ask yourself, are they hopelessly lost as a business model? Are their programs of interest to the marketplace?

One of the biggest challenges institutions are having today is pruning and culling their programs, and leaders must have the courage to look faculty in the eye and say, “by the way, that course is costing us lots of money, and you only have five people in it. We know you may like it, but we can’t continue to teach a course that students don’t want.” That can be a really tough academic decision, but one that must be made.

Wrapping Up

We believe that the disruption going on in higher ed has just started, and that surviving and thriving in the higher ed space will take intense focus to fine tune the systems, processes, and cost structure if institutions are going to compete and survive.

Competition for the adult student has heated up dramatically. Whether we like it or not, this is not only because more traditional institutions have decided to get into the market, but also because multiple institutions are now competing on price, including those that have state subsidies federal subsidies, and/or have large endowments. This can make it very difficult for smaller institutions to compete against as it allows larger institutions to “give away” of their offerings.

 

Bullet Points:

  • The higher ed sector has been relatively immune (or perhaps resistant?) to change since its inception, but in the past 10-15 years, and especially since the Great Recession, multiple things have changed, forcing changes on it. We now are seeing market forces unleashed, including consolidation, mergers/acquisitions, and closures as we’ve rarely seen before (and not in my lifetime).
  • Higher ed finds itself in the maturity to declining stages of the product lifecycle as characterized by declining enrollments, lack of differentiation in the higher ed marketplace, and an increase in market consolidation (M&A activity) and/or college closings.
  • Some smaller colleges and universities under financial stress are looking for ways to solve their problems, and one way is merging with or being merged into another institution.
  • There are multiple reasons for increased M&A activity in the higher ed sector besides market forces at work, and we need to look at the reasons why M&A activity occurs. Basically, there are three main reasons: New markets / customers, new technologies, or gains in efficiencies in operations.
  • Culture is critical when considering a merger, but the integration of cultures is never easy.
  • We believe that we will see more mergers and less of the organic growth from for-profits, including for-profits becoming part of nonprofits.
  • The Ed Department under Secretary DeVos believes it should not be committing all postsecondary education funding to what we now call hire traditional higher ed, but to improve the flow of federal funds to retraining programs.
  • Big changes from in accreditation will need to include a willingness to think in competency-based terms. This will require a major shift away from the strict Carnegie method of determining learning, to more of a competency-based approach to assessing learning outcomes.
  • One reason why the accreditation system as we currently know it does not (and will not) change is that accreditation is the university system’s greatest barrier to entry.
  • If you are considering merging with another institution, there are three things you should consider:
    • Are the cultures mergeable? Does the acquired institution see themselves as a business vs. being a learning institution (or vice versa)?
    • Does the acquired institution have the programs, faculty and administrative support that is consistent and that will integrate effectively with your own?
    • Is the acquired institution in good financial situation, or is it so broken that it cannot be fixed no matter how hard you try? Are they hopelessly lost as a business model? Are their programs of interest to the marketplace?
  • The disruption going on in higher ed has just started, and that surviving and thriving in the higher ed space will take intense focus to fine tune the systems, processes, and cost structure if institutions are going to compete and survive.
  • Competition for the adult student has heated up dramatically.

 

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