There's Something Fundamentally Wrong With The College Business Model

Is academic research really worth all the money that students are unwittingly paying for it? Not according to Larry Zicklin, former chairman of Neuberger Berman, a professor at New York University's Stern School of Business and a frequent lecturer on ethics at Wharton. In this opinion piece, he points out that if faculty members assumed larger teaching workloads, while doing less research, universities could deliver a college education at a fraction of its present cost. And all that would be lost would be a succession of what he sees as research papers that are of only marginal interest. Zicklin predicts that online education and other free-market forces will most certainly reverse this worrisome situation. He also wonders if students should have a say in how their tuition dollars are spent.

When I read academic literature, all too often by paragraph three I'm lost in a morass of quantitative analysis that is far beyond not only my abilities but those of almost every business person I've ever met. In my view, the authors devote far too much of their time conducting research and writing about it in articles that only their peers understand and too little time actually teaching. As a result, their students are getting progressively less for their money, a guarantee of future serious trouble for higher education. As someone said about the North Pole, when you're there, every direction is down. I happen to think the American university system is on top of the North Pole now and the sides are steep. One solution? Maybe it's time to give our customers, the students, a choice in what they actually want to pay for, and possibly scholarly research isn't it. The value of a free market is, after all, one of the things we teach.

Let me give you an example of the extent to which things are going wrong. A couple of years ago, a valued faculty member who was responsible for a prolific output of financial research at a well-known business school resigned. This caused great distress within the college, as the administration feared that the school's rankings would suffer because it would no longer be associated with his scholarship. But while he was the school's most successful scholar, he certainly didn't teach anything related to his research. How practical was that research anyway? I've worked in the financial area for 50 years and I didn't have a clue as to what his most recent articles were about -- and nor did various business colleagues to whom I showed them. If we couldn't decipher his writings, for whom were they intended? My answer: The community of scholars who write for one another but not for their students and certainly not for business executives who are interested in practical ideas that might actually work.

By way of a second example, a faculty member at another college told me how she was reproached by her co-author for getting behind on their book. She tried to explain her lateness by pointing out the demands of her rigorous teaching load. "Are you kidding me?" the co-author said. "How can you teach that much and still get your work done?" In other words, teaching wasn't her job; research and writing was.

Rising Costs, Growing Debt

We are constantly reminded of the increasing cost of a college education and of the debt students take on to obtain a degree. According to the Chronicle of Higher Education, approximately 20 million people attend college every year and 12 million of them take out loans to help pay for it. Outstanding student-loan debt now stands at nearly $1 trillion, divided among 37 million people. Of them, according to the Federal Reserve, 8.8 million are above the age of 50 and 2.2 million are over 60. Can you imagine being in your 50s or 60s and still owing on your student loan?

As for how much students need to borrow, Ohio University economics professor Richard Vedder says that those attending four-year public universities in 2010-2011 and 2011-2012 paid up to 7.9% and 8.3% more, respectively, than in the previous 12 months, at least double the inflation rate over the same two years.

This can't persist. Resources from government funding, individuals, foundation grants and well-to-do parents are not as available as in the recent past. Eventually (I believe imminently) there will be an inflection point and colleges will be left with too much overhead, too few students and large budget deficits. The top 50 or so schools may be temporarily exempt from the pain, but even they will suffer when the squeeze intensifies. Remember, in 2007 nobody could have forecast that Goldman Sachs, Citigroup and AIG would get caught up in a financial tsunami and require government assistance in order to survive. Train wrecks happen in slow motion and I believe we are approaching just such a pile-up.

So where does the amount of time teachers devote to academic research come into the financial equation? A preliminary analysis of costs at the University of Texas at Austin by the Center for College Affordability and Productivity discovered that the 20% of the faculty with the highest teaching loads taught 57% of student credit hours and were responsible for 28% of total faculty costs; that worked out at $662 per student taught a year. The 80% of faculty in the next four quintiles accounted for 43% of the school's teaching duties but 72% of all faculty costs, or $2,142 per student. The least productive 20% taught just 2% of all student credit hours but accounted for 9% of total faculty costs, or $3,794 per student. On average, the top 20% taught 318 students a year while the bottom 80% taught about 63.

One of the study's conclusions was that if the 80% of the faculty with the lowest teaching loads were to teach only half as much as the 20% with the highest teaching loads, the savings could result in a 50% cut in tuition costs. Numbers like these, if proven to be true, will not be lost on legislatures, donors or parents.

Along with health care, academia is one of the few industries that have enjoyed pricing power in a desultory business climate and it has certainly availed itself of that power. Higher education is also one of the few industries that has not improved its productivity despite a turbulent economic climate. But that will change. As we tell our students, the free market may sometimes work slowly, but work it ultimately will, even in academia.

There is no doubt that the technological change has already started, with distance or online learning rapidly increasing its share of the market. According to a 2012 Sloan Consortium paper, more than 6.7 million students were taking at least one online course during the fall 2011 term, an increase of 570,000 from the previous year, while 32% of higher education students now take at least one course online. This is taking place with only 2.6% of higher education institutions currently offering MOOCs (Massive Open Online Courses) with another 9.4% in the planning stages. There is much controversy about the quality of online teaching, but there is also evidence that students are satisfied with it and learn just as much as they do with face-to-face courses and live professors.

Online Learning

I still love the idea of a professor teaching in front of a class of 20 or 30 students but that is increasingly not the case. These days, adjuncts and graduate students are teaching courses that were previously the domain of full-time professors. Online learning employing the services of the most talented professors is a lot cheaper, and leading universities, including the University of Pennsylvania, are beginning to compete in what is obviously a massive new market. In the long run, traditional schools will have to cut their costs in order to meet this competition as well as a new financial reality. Who knows, perhaps Governor [Rick] Perry -- not exactly a hero of mine -- will prove to be right when he speaks of a $10,000 college education in Texas.

The cost of academic research is certain to come under scrutiny as colleges fight to compete. It's included in tuition fees, whether students want it or not, yet nowhere is the cost broken out. But a 2009 article in Forbes illustrated just how much of tuition goes to research. The magazine quoted the director of Wharton's Lauder Institute to the effect that "if you add up the cost of faculty time, of research assistants and administrative staff, of producing and purchasing data and of surveys and the expenses involved in publication, you'll find that somewhere between a third and a half of our total budget is directly related to research activity."

A third to a half! Where is the accountability for all this spending? Who makes that determination? Is this the optimal use of these funds? Do students get a say in where such a large piece of their tuition dollar goes?

Here's a bigger question, perhaps: Should every university be forced to engage in research? After all, only certain hospitals are research hospitals. Why must every full-time or tenure-track faculty member be obliged to do research to gain promotion or tenure? What if certain people don't do it well but are exceptional teachers? Have we debated how much value teaching versus research talents add to the well-being of the system? A friend on the committee that determines promotion and tenure at an Ivy League school once told me that promotion and tenure are based on three things: scholarship, service to the school and teaching ability. Scholarship comprised about 99% of the grade, he said, with the other two qualities sharing the remaining 1%.

We are in a period where every school wants to be in the top echelon of rankings -- as if anyone really knows all the qualities that differentiate one school from another. But college presidents are increasingly measured by how U.S. News or Businessweek ranks their school. Students want to graduate from one of these "elite" establishments, while professors love the aura of teaching there. One of the principal criteria rating services use is the volume of research published by the respective faculty, the theory being the more the better. A better way to assess the value of research would be to ask if it is relevant, insightful and accessible to those who need it. Is it used in the classroom and therefore beneficial to the students? Are the most productive researchers better teachers? That's never been proven and it hardly matters, as the most prolific of them don't do much teaching in the first place.

If academic research in business subjects is so important, one is forced to ask why business doesn't want to pay for it. Why is the number of corporate grants so small relative to the amount of product being churned out? If scholars were helpful in creating economic advantage for business, wouldn't it logically follow that business would be willing to finance such scholars? When challenged by a colleague, I had to admit that it was true that academia produced the Black-Scholes model of valuing stock options. But that was almost 40 years ago. Tens of thousands of papers have emerged since then with most of them having little or no business application.

I'm not suggesting that academic research should be discontinued. Rather, to paraphrase the economist Arthur Okun, I'm suggesting that research has a place but it has to be kept in its place. The time is ripe for a full discussion of the subject, including the exploration of the proposition that some schools, like some hospitals, should be labeled research institutions while others are not. And the ones that are not should not be deemed unable to provide students with a first-rate education. I don't think every public institution should necessarily try to emulate a private counterpart with a multi-billion dollar endowment.

In 1975, Wall Street firms ended fixed commission rates and unbundled their products and services, leaving it to their customers to pick what they wanted and negotiate how much they wanted to pay. Similarly, schools could unbundle what they provide and let students opt for what they want to pay for, classroom time or an online course for that matter but not research papers from which they will never benefit. Many things are beyond the capacity of certain schools and they shouldn't be penalized by rating agencies if they focus their limited resources on teaching. Let's not lose sight of the fact that education, not research, is the reason why a university exists.

The pressures are mounting and the technologies are improving. We should be debating the issues before the tsunami arrives.

This story was originally published by Knowledge@Wharton.