Public No More: Why the B-School Model Works

Students at a sit-in in front of the school president’s office at California State University, Northridge. Photograph by Kevork Djansezian/Getty Images

Many would argue, and we would agree, that despite global competition, the system of higher education in the U.S. remains the best in the world. Still, American universities face increasing threats on several fronts: an explosion of higher education outlets globally, stagnant middle-class incomes, entry of for-profit providers, and the growing efficacy of alternative delivery modes, especially on the Web.

The biggest threat, however, is the permanent decline in public support. As all universities grapple with the realities of the current economic slowdown, public universities suffer the most as they face dwindling state support.

Reactions to reduced appropriations include cost-cutting measures such as delivering the curriculum with lower-cost, part-time faculty and distance technology. The most significant reactions, however, have been to increase tuition rates for resident students and to increase tuition revenue by attracting higher paying nonresident and international students. Controversy abounds, with those affected asking why state-funded institutions are facilitating access to nonresidents and restricting access to residents.

Most protests about rising tuition blame the increasing cost of higher education. There is much confusion here. Tuition is the price of higher education, not its cost. Costs are expenditures on faculty and staff salaries, facilities, quality, and administrative overhead. Net tuition at public universities is substantially below the cost of delivering that education.

Has the cost of higher education been rising? From 1999 to 2009, there was relatively little increase in the real instructional cost per full-time equivalent. Yet over the same period, the students’ share of expenditure on higher education increased more than 33 percent as state funding dwindled. These data suggest that the real debate underlying higher education financing should not be focused on the cost of higher education, but rather on who pays for it: students or taxpayers.

One rationale for society to pay is that the return to higher education is larger than that associated with alternative uses. Why should society invest in higher education rather than in K-12 education, job training, and health care? It’s not clear that it should. More importantly, the recent permanent cuts per student to public universities are an expression of the public’s preferences to spend on other things. Today, shrinking taxpayer support makes the state-funded model unsustainable. The consequences for higher education are profound.

Continued announcements of tuition increases associated with permanent cuts in taxpayer support have led to frequent, sometimes vehement, protests by students, parents, and legislators. In the U.K., riots broke out. By contrast, U.S. business schools have charged higher tuition than many other units at major universities, yet little resistance has accompanied, for example, the significant increases in MBA tuition. Why the difference?

We think that perceived value, which is the difference between cost and willingness to pay, answers most of the question. Understanding this issue can go a long way toward explaining the current plight of public universities and the path universities will need to follow to weather the storm of declining state funding.

Business schools have invested in developing higher-quality services. They have committed to the student with a comprehensive learning environment and life-long engagement. They provide coordinated degree programs, career counseling, professional development, purposeful extracurricular activities, networking, placement, and significant alumni engagement. Few other academic areas offer the same student-focused environment. Students will pay higher costs if they perceive even higher value.

Overall, business schools have become more efficient because they are disciplined by market forces. They are not the only ones that have had to do so. Other professional schools, university hospitals, dormitories, food service providers, and others operate in a similar fashion. These are the “enterprises” of modern public universities. In contrast, many other academic areas have tried to retain the environment of a protected subsidized model that does not focus on students, on transparency, or on accountability.

As state funds continue to diminish, public universities can select a strategic alternative: They can choose to follow an entrepreneurial path to become “public no more,” with more financial self-reliance and less dependence on entitlement and internal subsidy. As business schools and other areas of the university have shown, this path can lead to academic excellence in a financially sustainable framework, but it requires making some tough choices.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE