Quality and the For-Profit University

One of the newest things to hit the American education scene is for-profit education. The term for-profit education includes many types of different schools ranging from the thousands of charter schools that have sprung up all over the USA to the growing number of commercial day cares. What I want to address in this post is the type of for-profit education taking place at the university-level and particularly why this type of education will never be able to compete for quality with not-for-profit universities.

I have written a lot about for-profit universities on this site. Most of what I have written is extremely negative. The for-profit universities I have covered on my blog range from diploma mills such as Rochville University that will sell you a diploma, to schools such as St. Clements University and Rushmore University that graduate students with no standard whatsoever. This post does not address these schools, but rather the education provided by more mainstream members of this industry, such as the Apollo Group and the Educational Management Corporation.

A commonly held perception of for-profit university is that it is an increasing threat to traditional universities. On-line testing company Plato has stated that traditional education is “broken”. Any negative response from traditional schools is treated as the natural response of a threatened old guard. The hyperbole of for-profit education is summed up in the Taiwan-based business blog Broken Bulbs. Its operator, Gordon Graham, writes about the for-profit University of Phoenix,

It is this dimension, prestige, that is important for many of these universities’ would-be customers…As they [for-profit universities] start to become established and release their very capable graduates into industry; their prestige dimension also starts to improve. When this happens, these universities will pose a real threat to traditional universities.

While Graham warns that, “It may take years for this to happen,” there is in fact no reason to believe it could even happen.

The Truth about For-Profit Education

For-profit universities have never been more than a niche market in the education sector. This slightly dated piece from Businessweek, points out that, “Revenues of for-profit education companies account for only 10% of the $780 billion spent on education…And the total market capitalization of education stocks makes up less than 1% of U.S. capital markets.” More significantly, the impressive growth figures often cited for for-profits have been exceeded by the not-for-profits. From 1989 to 1999, US-based for-profits reported 59% growth compared with 6% in public institutions. But this growth figure was only possible because for-profits started from such a low base level. The 6% growth for public institutions actually represented twice as many students as for-profits 59%.

In fact, careful studies of the for-profit education market have found that it is not nearly what its proponents claim it to be. As one extensive study found, rather than being a new phenomena, for-profit education is the direct descendant of trade schools that taught book keeping, secretarial skills, and cosmetology. The customer base of for-profits continues to resemble that of these early trade schools. Students at for-profit degree granting institutions are composed disproportionately of minorities and women. And despite having the reputation of offering flexibility that better serves working people, most students at for-profits attend full-time.

Why Would For-Profits be Better?

While there is very little research available on the outcome of for-profit education, what does exist seems to indicate it is not aimed at achieving high quality outcomes. In fact, how could it be?

The claim always has been that for-profit education is aimed at satisfying market needs that public institutions and their cousin not-for-profits can not cater to. Primarily that has been in the areas of student services, accessibility, and compatibility with job market demands – never excellence. Only in the case of elementary and secondary schools has there ever been the claim that traditional services are unable to provide excellence.

On this point, Broken Bulbs states that the universities most threatened by the new for-profits are,

…those universities that are caught between the top-tier universities such as Harvard, MIT, Oxford etc. and new universities such as the University of Phoenix.

But this is clearly just rhetoric. For-profits have been as successful as they have not because they have found amazing new teaching methods or administrative freeways that create classroom freedom. Rather, their success is linked to offering the minimum amount of instruction that can be delivered under acceptable conditions while charging a premium for their claims of greater student services, accessibility, and compatibility with job market demands.

I have no doubt that the University of Phoenix can compete with some of the better schools in the USA, perhaps even schools like the Stevens Institute of Technology. But if they do, this is not because they are able to provide a better learning environment or more successful student outcomes, but because Stevens suffers from serious financial mismanagement. This is almost certainly the case with any of the traditional schools they can be outcompete by for-profits.

In fact, for-profit schools are only successful in so far as they are permitted to live parasitically on the edge of the excellence established by not-for-profits. Many of the more well-known for-profits have none of the facilities normally associated with a university, such as libraries, computing facilities, or access to research. They are only recognizable as universities because they offer instruction that they call ‘courses’ covering conventional subjects and are permitted to grant degrees. They are able to hire competent faculty educated in conventional schools. Their students can obtain books and other research materials from public libraries and read material in conventional university’s libraries. In their class projects, they can report the results of the research programs of professors and students in traditional schools. In fact, since there is no research being conducted in the for-profits, without the continued existence of not-for-profits, students in for-profits would have nothing to learn, read, or write about in their classes. It is not clear to me what Instruction in these schools would become without the continued flow of information and methods developed in traditional universities.

It may be, as some of my readers have claimed, that education is irrelevant to performance at work – but that is a whole other claim. If education is important to the performance of professionals: of nurses, of engineers, of managers, then for-profit education can only survive because it is not involved in the vast majority of work that has made the modern university system the supreme agent of tertiary education. As much as they can compete with the not-for-profit sector, they will be able to compete only against schools that are poorly managed.

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341bfa2953ef00d83420167c53ef

Listed below are links to weblogs that reference Quality and the For-Profit University:

Comments

As I’ve pointed out before, if these schools are really different, then why not give out different degrees? As you say Scott, they want to use the reputation of the existing system while mouthing the words of revolutionaries.

Don’t we all work in ‘for- profit‘ universities?

Come to think of didn’t we all get our B.A., M.A. and PhD degrees at ‘for-profit‘ universities back in Canada, Australia and America?

I don’t work in a for-profit university. In fact, the MOE makes sure that Ming Chuan is a not-for-profit. We would loose our accreditation if we ran the school for-profit.

I don’t know about you Fred, but I certainly didn’t graduate from a for-profit university in Canada. I went to SFU and Queen’s University and they’re non-profit organizations. I am virtually certain that you didn’t graduate from a for-profit, unless you went to a place like the Art Institute of Vancouver, which is owned by EDMC
http://www.edmc.com/programs/ais.shtml
or another similar school.

I think you might be confused about the definitions of for-profit and not-for-profit. A brief definition of this distinction can be found here

http://www.investorwords.com/3331/non_profit_organization.html

For a more complete understanding, see these sites
http://alkaline.vestris.com/docs/alkaline/vestris-noncommercial.html
http://www.wordiq.com/definition/Non-profit_organization
http://www.psp.gov.ab.ca/index.cfm?page=faqs/NonProfitFAQs.html

Those are good links.

In everyday usage, “for profit” would certainly have applied to UCB while I was there. The university drew from large amounts of public funding, and yet it was still very aggressive about generating patent revenues. Also, the single highest paid employee of the university outside of the tope tier of administration was our football coach. Why? Because football brings profit.

Sorry Mark, but everyday usage is not very important here. UCB is not a for-profit organization. EDMC, Apollo, and Edison are for-profit educational companies. And none of them have any confusion about what it means to running a school for profit.

Scott,

All unversities set out to make profit.

Ming Chuan included.

In Australia, the universities are out to make money as well – as are all other universities in the UK and US.

I’ll check your link but, to me, education is business and all schools set out to make money whether they are funded by the government or nut.

I graduated from SFU.

I’m sorry Fred, but that’s not what ‘for-profit‘ and ‘not-for-profit/non-profit” are referring to. This is a distinction that every businessman and every school administrator understands. This distinction is widely understood in commercial practice and not in dispute anywhere.

Seriously, I recommend you have a look at the links I posted above.

Scott,

I understand what you mean by when you say, “not-for-profit.”

Universities are, “theoretically, not-for-profit“.

I’m guessing they make a ton of profit, but I do suppose a lot of the cash goes back into developing the school and facilites on campus.

Have you ever checked the annual report for your school?

All you’re saying is that there’s money involved in the running of both of them. But Fred, that’s not the point. If it an organization is run for-profit, there is an entirely different style of management. That’s why there is an entirely different management literature dealing with it.

What you’re saying is like saying that the BC Med and an American HMO are the same thing because they both involve a lot of money.

Honestly, there would be no one — and I mean not even 1 person — working in university administration and the management of a for-profit university who would disagree with the distiction made in the links above. It is, in fact, everything.

This confusion is a bit strange. Cash flow is not profit, although it is difficult to have profit without cash flow (but not impossible). Profit means there are funds generated by the firm that go to shareholders who own some stake in the firm. This is most often seen in the form of stock for publicly owned companies. Companies like this have a legal obligation to generate funds above and beyond cost that will be paid out to the shareholders. A football coach is an employee, not a shareholder. A public university cannot sell stock and people who work for the university cannot trade shares of their ownership. These people are certainly stakeholders, but they have no legal tie to the organization and the organization has no legal obligation to pay them anything above their negotiated salary.

This is not the case for a for profit organization which MUST pay out funds to the owners. If a publicly traded company fails to make a profit, they are open to law suits from shareholders. If it can be shown that opportunities to make profit were turned down, there would be legal punishments for the top managers. The head of a non-profit organization, however, has no such risk. There is no obligation to pay shareholders.

Let me repeat this, a firm that is owned by shareholders (be they private or public) MUST pay out money to those owners. MUST. There is no option, MUST. This is Scott’s point. With a MUST hanging over your head, there is a very big change in motivations. NOT MAYBE, but MUST.

Just because an organization does not have a loss, does not mean that money is distributed to anyone. Certainly, a hospital can use that money to attract better doctors (we do live in a capitalist system after all), and those doctors can help to draw patients, and then the hospital can increase revenues, which allows better equipment to be bought, etc. At no time is an actual profit being made, because the money would have no where to go. It must be used within the organization.

And to correct Fred, we do not all work at for profit organizations. There is not a single public university in Taiwan that does not actually have a loss, and public US universities are the same. This is why they require government cash transfers (donations) to continue operations.

Let me clarify the MUST a bit.

If there is any money above fixed and variable costs, the firm returns that money to the shareholders. In return, the shareholders will value their shares, and may even sell their shares at a profit to others who see the firm is generating cash for shareholders.

If the organization cannot pay its shareholders, then those shareholders will NOT infuse any more cash into the firm and may seek to dump their shares (again, this could be public or private). As these shareholders lower their valuation of the firm, the organization runs into a serious problem. Since there is no profit to pay shareholders, and by implication, the firm is actually spending more than it is making, where will the extra cash come from to make up the difference? The answer is nowhere. The firm will either make a profit that will be eventually distributed to shareholders or the firm will close.

The only exception to this is that non-profit organizations can have money infused without anyone demanding a piece of that pie. Who infuses such funds? Certainly not banks or investors. These are donations.

Scott, here’s an interesting bit of info:

Britain is a haven for fake degrees

Michael

Only in the case of elementary and secondary schools has there ever been the claim that traditional services are unable to provide excellence.

I’m curious what your opinion is on why for profit secondary schools would compare favorably with public schools, where as for profit universities can’t. Do you think it’s related to the scale of Universities? Or is it due to some other factor?

I think you’ve got my point backward. Traditional elementary and secondary schools make no point of providing excellence. Their goal instead is to provide reasonable education to a general population. As such, there is room for for-profits to provide excellence, since public elementary and secondary schools make no pretense of providing high quality. Universities, on the other hand, aim to provide excellence. With the vast resources of the State and centuries of history behind them, there is no room for competition.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: