New report forecasts significant change in university business models

The only text on the opening page of Ernst & Young’s new University of the Future report is this:

Over the next 10–15 years, the current public university model in Australia will prove unviable in all but a few cases.

The text sits atop an image of a grand university hallway, all stone pillars and solemn design; the text’s message and the image are brilliantly at odds. The rest of the 2012 report predicts the disassembling of the traditional university landscape in Australia over the next decade or two. While the research upon which it was based was limited to Australia, the implications of the Ernst & Young study could well be applied to most leading tertiary education systems across the world. University of the Future is based on primary and secondary research with more than 40 leaders representing over 20 public and private universities, policy makers, and sector representative groups in Australia. According to the report’s author – Justin Boker, executive director in Ernst & Young’s education practice – the research suggests two case scenarios, one conservative and one more extreme:

• Conservative: “At a minimum, incumbent universities will need to significantly streamline their operations and asset base, at the same time as incorporating new teaching and learning delivery mechanisms, a diffusion of channels to market, and stakeholder expectations for increased impact."

• Extreme: “At its extreme, private universities and possibly some incumbent public universities will create new products and markets that merge parts of the education sector with other sectors, such as media, technology, innovation, and venture capital.”

Boker attributes the changing features of the Australian university landscape to the following:

• greater access to education and knowledge;
• increased global competition for students;
• a tougher funding climate;
• the massive and wide-ranging impact of online delivery models;
• global mobility of students, professors, and education brands;
• progressively deeper collaboration between universities and industry.

He points out that digital technologies have quite simply transformed almost every other industry and that higher education is next. As ICEF Monitor articles have been illustrating all year, for some players at least it may not be so much a case of “next” as it is “now."

Which new model will define your business?

The typical university in Australia, explains the Ernst & Young report, is quite generalist in nature, appealing to a wide range of students and offering a wide range of programmes and courses. It prioritises campus offerings and the campus experience, though it may now be offering online and/or international complements to campus-based learning and administration. As for what this typical university might evolve into  – or compete against in the not-so-distant future – the report lays out three models:

• “Streamlined Status Quo” – Established universities that “continue to operate as broad-based teaching and research institutions, but that will progressively transform the way they deliver their services and administer their organisations — with major implications for the way they engage with students, government, industry stakeholders, TAFEs, secondary schools, and the community.”

• “Niche Dominators” – Established universities and new entrants that “fundamentally reshape and refine the range of services and markets they operate in, targeting particular ‘customer’ segments with tailored education, research and related services – with a concurrent shift in the business model, organisation and operations.”

• “Transformers” – Private providers and new entrants that “carve out new positions in the ‘traditional’ sector and also create new market spaces that merge parts of the higher education sector with other sectors, such as media, technology, innovation, venture capital and the like.

These models all represent a variation of one degree or another on the traditional and still most common model.

Streamlined Status Quo

The "Streamlined Status Quo" comprises those universities that, after a serious critical look at their operations and revenue streams, will continue to cater to a multifaceted student segment but will:

• cut out unprofitable disciplines and possibly merge smaller disciplines with competitor institutions to achieve scale;
• invest significantly in digital sales and delivery models;
• partner with public and private institutions – higher education providers, TAFEs, secondary schools, or industry partners – to deliver programmes more effectively and/or to new markets;
• outsource administrative functions or share these with similar institutions to drive down costs and/or achieve efficiencies.

Basically, this model is the bare minimum Ernst & Young advise universities adopting; the report argues that “most universities have ample scope to streamline their business and operations” and says that most currently carry excessive support staff overheads.

Niche Dominators

The "Niche Dominator" constitutes a more aggressive realignment, wherein a university constrains itself to:

• only certain market segments (the report offers mature-age distance learning students as an example);
• only certain programme disciplines (the report offers the UK’s BPP University College, a for-profit offering only profession-based programmes in accounting, banking and finance, law, marketing, and human resources, as an example).

"Niche Dominator" institutions will often be for-profit and private (but not necessarily so) and have “deep alliances” with industry in their chosen fields. They will also have streamlined back office operations. The report acknowledges that some of those interviewed for the research upon which it is based raised issues of scale as a possible hindrance to this model becoming widely adopted, “citing 20–25,000 students as a base number to maintain an economically viable university.” But Ernst & Young see this particular problem arising only if a university didn’t first streamline its operations and make more use of its asset base. It stands to reason that the "Niche Dominator" model is for those who have established strengths in certain areas and who are confident enough in these – and their marketing and revenue potential – to drop other areas that might distract from them. Institutions that go this way will likely be aiming for a leadership position in the given niche, as there will be less room in a tighter category.

Transformers

"Transformers," meanwhile, will be the direct result of all the disruption we’ve seen across the global higher education landscape this year, begun largely by the entrance of MOOCs via collaborative networks like Coursera. The "Transformer" basically blows up the idea of education as a discrete segment, and instead looks at market needs (e.g., distance education, free education, and customisable, customer-driven education such as degrees from various institutions with different specialties) and builds educational “products” from there, via whatever means appear most effective. Ersnt & Young say the model is not something a university can morph into by itself, but rather something it can be part of by defining itself as an “innovator” and strategically aligning with other institutions and entities both within and outside the educational realm proper. According to the report, innovators:

• extend the definition of a higher education ‘customer’ to include content wholesalers, content consumers, financiers, employers and parents;
• disaggregate the value chain to create new areas of specialisation, such as content aggregation, mass distribution, assessment and certification;
• combine traditional education services with services in related industries,such as media and entertainment, financial services and venture capital;
• build a sales model that is predominantly digital and build delivery models that combine digital services and specialist ‘face to face’ services sourced from partners;
• outsource student services,while retaining ownership of their customer relationships, using cloud-based customer relationship management tools and techniques;
• outsource their full suite of back-office functions.

The report imagines the “Transformer model will be led by private providers and new entrants” but notes that “savvy universities will seek to create value in this space in partnership with private providers and new entrants … universities are uniquely positioned to bring credibility and to act as curators of content.” It says the challenge for public universities will be to “cut the right deal” and imagines an increasing role for consortia. The report asks its readers:

What impact will innovation and new models in higher education have on your institution? What opportunities will they open up?

The time horizon set out in the Ernst & Young report makes these questions seem rather pressing. Perhaps the larger question for many education leaders is to what extent the future foreseen in the Australian report matches up with the future they anticipate, and to what extent – and how quickly – their individual institutions can adapt.