Colleges Link Up to Cut Costs
This is the fourth part of a multipart series on the business of college.
Financial officers from colleges and universities faced with spiraling expenses have discovered the truth in the maxim "There's strength in numbers." And they're using that strength to wrest some savings in their school budgets.
Take the case of a group of 20 Wisconsin private colleges that several years ago sought to broker a better deal on the diverse array of student health insurance plans each offered on their respective campuses. "We went out to the major carriers and said, 'Can you give us a better price if we bring in our 58,000 students, as opposed to a college of 2,500?'" said Rolf Wegenke, president of the Wisconsin Association of Independent Colleges & Universities (WAICU), an organization representing private colleges in the state.
They were able to negotiate a less expensive health plan, with new added perks like immunizations, wellness programs, and mental health-care services—at two-thirds of the listed price. "In the end, we ended up with our ideal," Wegenke said. "Everything we wanted was built into it for less cost."
Reducing Pressure for Tuition Increases
Collaborations like these among colleges and universities are quickly changing the way business is being conducted in the higher education sector. One of the most popular means is through regional and statewide consortia like the Wisconsin group, where schools leverage their purchasing power for services and goods, administrative services, and information technology. In a few instances, schools are joining together beyond state lines. One such organization, the nonprofit Coalition for College Cost Savings (CCCS), has managed to get more than a dozen state groups to come together on contracts for items such as maintenance supplies and computer hardware. In addition, for-profit companies have stepped in, brokering deals for large state universities and communities across the country, saving perhaps 10% to 15% on everything from office furniture to janitorial services.
The driving force is the desire for schools to look for new says to reduce the pressure for tuition increases, said Tony Pals, a spokesman for the National Association of Independent Colleges & Universities (NAICU). Schools, like many other businesses, are also struggling with soaring costs in areas such as utilities, health-care premiums, and information technology, he said. "The bottom line is that for institutions to survive financially in the coming years, they are going to have to adopt more business-like operating practices," Pals said.
Indeed, a growing number of consortia are operating like large-scale group purchasing businesses. Wegenke, of the Wisconsin group, said his organization's joint purchasing agreements have become an "overnight phenomenon." He now manages nearly 30 different collaborations for his 20 member schools, ranging from back-office administrative functions to joint administration of health plans. From 2004 to 2007, the group has saved its members, through cost-saving collaboration, approximately $16 million, Wegenke said.
"What we have done is concentrated every year on the more complex projects our members find it hard to do on their own because, frankly, that's where the bigger savings are," he said.
The savings are being passed on, for the most part, to the students at the schools, either through tuition or financial aid, Wegenke said. For example, from 2006-07 to 2007-08, the average increase in tuition and fees for the 20 schools in the WAICU group was 5.3%, slightly below the 5.9% national average increase in tuition and fees published by the College Board last fall. He said he attributes the lower tuition cost for his group's schools partly to the cost-cutting efforts.
Credit-Card Program Leads to More Savings
The National Association of Independent Colleges & Universities reports similar gains. The average increase in tuition for the upcoming academic year for NAICU's members will be 5.7%, lower than last year's 6.1% average increase. "The procurement agreements have shown immediate results," group spokesman Pals said. "The joint purchasing agreements have been able to help institutions better control their costs."
The Coalition for College Cost Savings is also growing at a rapid clip. It was informally started in 2004 by David Jones, a retired procurement officer from Vanderbilt University who now serve as CCCS's executive director. He wanted to see if he could find a more efficient and cost-effective way for schools to use procurement cards, the credit cards typically issued by a university to staff for everyday purchases.
He was able to negotiate a deal with JPMorgan Chase (JPM) for a procurement card that would allow schools to electronically track their purchases and earn rebates on purchases. There are now 18 state college associations with memberships in the coalition. The 476 private colleges represented through these state associations spent $30 million last year through the procurement card program and they are expected to spend $50 million this year, Jones said. Since that time, he has negotiated two new agreements for consortium members, including a computer hardware leasing contract and a partnership with Provista, a national group purchasing organization based in Irving, Tex.
"We really hit a nerve with the opportunity around the procurement card contracts," Jones said. "We discovered there was a real appetite for this collaboration."
More Group Deals on the Horizon
Indeed, the demand for the services that these coalitions offer has grown more quickly than most anticipated. Responding to the need are businesses like the Horizon Resource Group, a for-profit group purchasing organization based in Brentwood, Tenn., that has 1,500 member schools, about half of which are public universities.
Horizon's founders are former executives from a group health-care purchasing organization who saw a need for a similar type of service at colleges and universities, said Ward Brown, Horizon's chief operating officer. The group negotiates purchase agreements that are utilized by members. Horizon, meanwhile, is paid fees by the suppliers in their contract portfolios.
"The business model is a proven one and we saw a need in higher education where no one was focused on helping these institutions nationally," said Brown, who helped launch the organization in 2001. "We've had pretty steady growth since we started, but it has really started to pick up momentum in the last few years."
The higher education consortia do face some hurdles. Vendors could see them as a threat to their profits, and state schools can be bound by government regulations. But backers hope to form more consortia in coming years. "It is still not the universal panacea, but it does make a difference," said Wisconsin's Wegenke. "Any dollar that you can avoid spending helps you."