With Industry Pressures Looming, Colleges and Universities Reconsider Business Models

As our team has been busy preparing for the 2015 EACUBO Annual Workshop in Washington, D.C. next week, the higher education industry has been making headlines. Earlier this month, Sweet Briar College—a small, private nonprofit institution—announced that it would be closing its doors at the end of this summer due to financial difficulties, opting to forego what many perceive would be an inevitable “death spiral”.

Sweet Briar is an unfortunate case—but as alarming as it may be, it’s but another proof point highlighting the significant challenges that institutions face when trying to remain relevant and deliver on their mission. As the economy and job market slowly recover, business and policy pressures have intensified for colleges and universities on various fronts: demographic shifts across the U.S. are further pressuring peaking enrollment numbers; high operational costs and the growing influence of alternative methods of education delivery are straining balance sheets; and shortfalls in federal and state funding mean that governments can only do so much to buoy struggling institutions.

For many colleges and universities—and particularly institutions with less robust endowments—these pressures have prompted a need to strategically assess the short- and long-term viability of their business models. While many have been adjusting their operational procedures to boost efficiencies, some institutions have taken more aggressive steps to overhaul or restructure their operating models.

Here are a few of the unique scenarios we’ve seen emerge across the industry:

For-profit to nonprofit: While for-profit institutions are able to access diverse sources of private funding, the reputation of the for-profit model has come under considerable public and governmental scrutiny in the last several years. Especially with stricter gainful employment rules on their radar, for-profit colleges and universities are increasingly considering a shift to the nonprofit model. Of course, nonprofit status restricts an institutions’ ownership parameters and moneymaking ventures, but it can provide a reputational boon in the eyes of regulators and prospective students, while also offering all of the financial benefits of tax-exempt status, including eligibility for state grants and other forms of federal student aid. 

Nonprofit to benefit corporation: Last month, Alliant International University, a small institution in California, became the first in what is expected to be a number of colleges and universities switching their nonprofit status to a for-profit benefit corporation model. As a tuition-dependent institution with no endowment, the benefit corporation status will allow Alliant to access private capital markets as a for-profit institution, without relinquishing its public commitment to upholding its mission and purpose under California law. This workaround is attractive for some institutions, as it allows access to private funding along with the reputational support of the benefit corporation model, which mandates accountability and transparency. However, the model is still very new, and time will tell how successful Alliant and other institutions will be in adopting and executing this unique approach.

Mergers and joint ventures: In the year ahead, we will see more colleges considering resource sharing and consolidation in the form of mergers and joint venture agreements. Though notoriously difficult to execute, these partnership arrangements can improve operational efficiencies, providing institutions with more resources for outreach, greater diversity of student programs and stronger overall offerings to compete for students and faculty. However, for two organizations to partner or merge, they must carefully and strategically engineer their finances and operations. Above all, they need to achieve alignment across and within the organizations around mission, governance structure and overall objectives for these arrangements to work.

With the many pressures and shifts occurring across the higher education industry, how is your college or university strategically evaluating its business model?