Time to Turn Disruptive Technology Loose on Higher Education

Borders Books at 1807 Fordham Boulevard in Cha...

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Let’s Amazon Education!

The demise of Borders Books this week is a useful reminder that bad things happen to good people in business just as in the rest of life.  Borders and Barnes & Noble were pioneers in the big box book business.  Borders sprang out of Kmart and was spun off to extract the value it created by offering more variety and lower prices than local neighborhood bookstores that fell in the face of such big box competitors.  B&N and Borders were on a roll and grew market share until an upstart called Amazon rewrote the rules for big box stores and started doing to B&N and Borders what they had done to the Mom & Pop bookstores.  The death of Borders for lack of a buyer in bankruptcy is not a cause for cheering among its competitors—-they hear footsteps!

What does this have to do with higher education?

The Borders experience is a lesson in disintermediation that every college faculty should be studying. Choose any college or university you wish and look around.  What do you see?  Fat, bloated institutions protected from competition by the accreditation barriers to entry, the way customers (“students”) pay the bills, and the willingness of state governments, alumni and parents to continue to tolerate rising costs, dumbing down of performance, and our willingness to accumulate obscene levels of debt to give our kids the experience we once had.

Education, especially higher education, is ripe for the disruptive technology picking.  It is the perfect candidate for disintermediation and cash starved states just might be open to a creative proposal to monetize their “investment” in higher education thus saving billions of dollars more each year to sustain the unsustainable costs and thus save higher education from its excess.

What is disintermediation?

In economics it is the squeezing out of the middlemen in the supply chain.  That is what Amazon did to Borders and Barnes & Noble as well as the mom and pop bookstores.  By going direct to the end user and offering high quality products at lower prices in a process that is fast, safe and easy.

Some private for-profit schools have attempted to take market share from more traditional colleges and universities.  University of Phoenix is one of the most successful.  But if you think Phoenix and other online college degree programs are about education you would be wrong.  The business model for the University of Phoenix and virtually every other public and private institution of high education is suctioning up Federal education money in the form of student loans and grants.  To qualify it must follow the rules and universities are very good at doing so.  Our Federal government likes this.  It likes it so much that it deliberately pushed private banks out of the market for student loans and created a monopoly of its own.

The consequence of this duopoly of Federal student loan financing and higher education loan facilitating is to create a captive market of parents and students who believe they have choices between schools, but the institutions of higher learning are more like “branch banking” in the game.

Over time most universities have been drugged into compliance and the government has reinforced “tradition” even though beneath the ivy there is a fungus growing that is rotting the institutions to their core.

The “system” has resulted in students spending a fortune to acquire degrees that often do little to help them earn a living.    Faculty spend less and less of their time teaching and more time in “research” and pursuing their other “jobs” like writing, consulting and re-purposing the intellectual property they create on the University’s time into business ventures of their own.  We have rationalized this process as creating an “incubator for new business” and indeed it has since we find it around virtually every large research university in the country.  Communities love it because it creates new business, new jobs and cash flow.

It has been a lucrative system except for a few problems:

  1. The cost of higher education, like health care, is out of control.  Without competition the schools have little incentive to control costs when they can raise tuition and fees and the Federal government will loan parents and students the money to pay it.  California State University system has raised tuition and fees twice in the past year blaming state budget cuts for the near 20%+ increase in cost.  Yet the CSU system has more administrators (12, 183) than Faculty (12,019). Between 1975 and 2008 the number of Faculty increased 3% but administrative jobs increase 221%.  No wonder student loans  are so secure they cannot be discharged even in bankruptcy.
  2. Higher education is increasing a bad deal.  The purpose of a college degree is supposed to be to prepare us for a productive life.  As parents we need to get these kids of ours out of the house and ‘off the dole’. According to collegescholarships.org the average US college graduate today has $20,000 in student loans.  Graduate students in professional schools can easily have $100,000 in student loans before they become doctors, lawyers or whatever.  While scholarship money may be more plentiful in private colleges the debt levels are about the same.  Such debt levels raise serious questions about the value received compared to the earning potential of graduates in many fields.
  3. Higher education is failing to prepare students for the Nation’s future needs.  Not only are college costs out of control and the value proposition sucks but colleges are taking all this Federal money and yet not preparing students for the skills the nation most needs to assure its economic growth and prosperity for the future. The system charges the same and values all degrees the same despite the need for more math, science and technology skills than we need people with degrees in women’s studies, cultural resource management or interdisciplinary studies (whatever that is) to name a few.

The demographics of our nation are loaded toward the fast pace retirement of the baby boomers with 10,000 per day I’m told retiring over the next ten years.  We’re losing a lot of experience in a short period of time and we need to replace the lost experience with fresh skills.  But preparing students for their future is not always the real objective of higher education today.  The institutions are looking out for themselves more than they are their student customers.

So how do we change that?

The way to get a better deal out of higher education is to Amazon it!  Invite competition to improve the value creating potential of teaching, research and service. Leverage its intellectual property, patents and value creating potential to produce revenue.  Re-align the interests of the faculty by replacing tenure with the functional equivalent of “share options “ in the value from the number of students hired upon graduation, the number of research projects funded by business, incubation and support services the university can produce and sell to customers and other metrics that make better sense.

I wonder what the administrators to faculty ratio at Cal State would be if the State of CA would IPO Cal State and tell its venture capital owner to go make money, pay taxes and train people for business to hire.

Better yet create an auction for each degree program.  The ones that get Series A funding get to keep going but with new bosses whose job it is to deliver on their promises in the contract bids they made at auction.  Can the math department get 25 sponsors for its 50 students creating a market for jobs that means the students compete to be first in their class and get done in 3 years instead of 4 to land the best job posted by the sponsors.

Sure they can still have fraternities and party all night as long as the job gets done, on time, on budget and according to the spec.  Wouldn’t you love to see those profs working to make their quarterly numbers—-or else?