What to Keep
Enterprise transformation involves redesigning or creating new work processes that enable remediating anticipated or experienced value deficiencies. This implies that some aspects of the enterprise have to be discarded. Why not discard everything? That is certainly as option, but it is called liquidation rather than transformation.
A central question is what do you keep and how does it need to change? To avoid answering with a stream of abstractions, let’s consider a specific example. Higher education has replaced healthcare as the poster child for runaway costs. It is useful to look at this from the perspective of a single enterprise in higher education attempting to transform itself.
What should they keep? Typical mission statements involve some combination of education, research, and service. Students, their families, and employers value education as a means to a good standard of living, employees who excel at their jobs and, in general, productive, informed, and involved citizens. Every educational institution wants to meet this need. The question is how best to do this. Is it classrooms and lectures, or online courses, or something different?
This is the point where strategic thinking often falters. Most universities have made enormous investments in faculties and facilities for delivering education in traditional manners. There is an increasing trend of “outsourcing” delivery to adjunct faculty rather than more-expensive tenure track faculty. This saves money but does not fundamentally change the process.
The value of research is much more ambiguous than education. At one level, research helps the faculty to be on the cutting edge, thereby enhancing the education mission. At the other extreme, the research enterprise becomes an end in itself. The goal is typically ever-increasing sponsored research budgets, which results in many faculty members teaching little or perhaps not at all.
If successful, the research enterprise can help the university’s ranking by increasing funding and PhD graduates per faculty member and, over time, the number of faculty members elected to prestigious academies. It can reasonably be argued that increasing rankings will lead to increasing numbers of applicants for admissions, which will enable increasing entrance requirements and lead to better quality students.
This all seems to make sense, except for the costs of doing it. The costs of creating winning proposals are enormous. This is due to the 5-10% success rate at the prestigious National Science Foundation (NSF) and National Institutes of Health (NIH). Faculty members are provided release (non-teaching) time to devote to proposal preparation and submission. Every tenth time or so, they succeed.
Once the grant or contract is won, the university is reimbursed for its direct costs plus indirect costs, typically estimated to be 50-70% of direct costs. These “overhead” monies pay for administrative costs (provosts, deans, libraries, etc.) that are spread uniformly across all sponsored projects. Administrators argue that the overhead funds received do not really cover all the relevant costs. Sponsors argue that many of the costs in the overhead pool are not relevant to conducting research. The final overhead rate is a matter of negotiation.
The research enterprise has to be subsidized because it loses money on both the front end and back end of the process. This is inherent to the market being addressed – NSF and NIH. Other research sponsors such as the Department of Defense (DOD) and the National Aeronautics and Space Administration (NASA) have different award decision processes and typically higher success rates.
Industrial funding (as contracts, grants, or gifts) is such that proposals are discussed and refined along the way. One quickly learns that the idea is a loser or is able to refine the idea until funding is assured. The upfront costs per success are much lower. The downstream overhead costs are still an issue, but are open to negotiation. If a university were to strip out all the costs of working with the government, industrial overhead costs would be lower. In fact, they are typically higher because universities can get away with this.
One strategy for fixing the economics of research would be to minimize or avoid NSF and NIH proposals. This would run into another very large obstacle. Funding from NSF and NIH is viewed as more valuable because of their peer review process. To get funded, one needs more than a good idea. One has to convince anonymous peers in one’s discipline that the proposed research fits into the discipline and will advance the discipline.
Thus, NSF or NIH funding vets the faculty member as fitting in, as being valued by peers. This lessens the burden on administrators and faculty committees in evaluating faculty members. In effect, they have outsourced evaluation. This places great emphasis on the source of funding and peer approval rather than the outcomes of the research such as articles published, patent filings, and artistic exhibitions.
If evaluation was limited to outcomes, then the problems of money-losing research operations could be overcome in a variety of ways. High probability funding sources would be much more important than low probability, and typically very slow, funding sources. The marketplace of ideas, rather than solicitation announcements and peer review panels, would become the focus. Researchers would spend much more time on producing outcomes.
The third element of a university’s mission is service, sometimes called outreach. Support of professional societies and involvement on advisory committees are good examples. Unfortunately, academia is highly subject to mission creep. They find more and more services they could provide and invest resources to provide them. The result is that the numbers of academic staff has long been growing at twice the rate of the numbers of academic faculty. All the new vice presidents need staff assistants and growth continues.
Among the many areas that could be discussed, entertainment deserves the closest attention. The biggest elements of many universities’ entertainment enterprise are men’s football and basketball. They earn billions of dollars of revenue, pay millions to coaches and athletic directors, and graduate few of their “student athletes.” These athletes rightfully should be employees of the entertainment business.
It is not a question of the merits of this entertainment business in itself. It is a question of whether academic institutions should be in this business and subsidizing it, as the vast majority has to do. Some argue that alumni like this entertainment and this generates increased donations to the university. My experience is that a significant portion of these donations goes to the sports side of the university rather than academics.
One solution would be to set up the entertainment business independent of the university. Alternatively, it could be outsourced like food services are done at most universities, and the bookstores at many universities. The football and basketball entertainment business could be outsourced to the National Football League (NFL) and National Basketball Association (NBA), respectively. The NFL and NBA could then pay athletes minor league salaries as done in baseball.
Considering what to keep when transforming an academic enterprise, the following conclusions seem warranted:
- Keep the education line of business, but consider a much broader range of approaches to delivery; be cautious when investing in physical classrooms
- Keep the research line of business, but get the economics right to generate both knowledge and money; be skeptical of low probability opportunities
- Keep the service line of business that relates directly to the education and research businesses; spinoff or outsource all the rest
Success in adopting this strategy will depend on several other things:
- Move to activity based cost accounting and minimize non-attributable overhead costs; aspire to achieve a near-zero overhead rate
- Price services based on costs directly attributable to these services; include profit margins that are competitive in relevant markets
- Retain money-losing services only to the extent that they are vital to one of more lines of business; if there are many of these, you have not faced reality
- Outsource everything that someone else can perform better and/or cheaper; become expert at selecting and managing vendors and partners
There is one final, critical need. Define, measure, and reward performance in all aspects of the business. This can be problematic in academia. Universities have great difficulty penalizing poor performance and even greater difficulty rewarding good performance. Thus, poor performers hang around – for years, even careers – and good performers get frustrated and leave. Fix this as soon as possible.