The Hechinger Report researcher Jon Marcus discusses the full extent of the transfer of public money to private contractors, especially OPMs, in American higher education.
Dan: My guest today on the Mortarboard Podcast is Jon Marcus, higher education editor at the Hechinger Report, and who also writes for the Washington Post, the New York Times, the Boston Globe, Wired, Medium.com, and other magazines, newspapers and websites. Jon holds a master’s degree in journalism from Columbia University and a bachelor’s degree from Bates College. He attended Oxford University and is a non-resident fellow this year at the Princeton University School of Public and International Affairs. He teaches journalism at Boston College and Northeastern University. Jon, welcome to the podcast.
Jon: Thanks for having me.
Dan: According to your research dollars, lots of dollars, public dollars, billions of public dollars, are increasingly flowing from not-for-profit educational institutions to for-profit companies. Can you tell us about what you found?
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Jon: Yes. We see universities providing services to students and we don’t often, or at least people outside of higher education, don’t often stop to think about who exactly it is providing that service or follow the money over the years. I think people have gotten used to seeing outsourcing in dining, custodial services, bookstores – Follett and Barnes and Noble run most of the bookstores now at colleges and universities in the United States – both in-person and online. Now we’re beginning to see more outsourcing, as one of the experts that I spoke with about this put it, closer to the heart of the academic mission of the institution. So you’ll see one area of significant growth is online program management, or OPMs such as Noodle and 2U. Those are seeing enormous growth this year, probably propelled by the pandemic, but even before the pandemic, they added up to about $4 billion a year in revenues from universities and colleges to provide online courses and programs. The advantage to the institution is that the OPM will front the startup money, the very expensive instructional design and training it requires to create an online course or program, which universities and colleges often don’t have readily available to do. The downside is that these OPMs will take commissions of as much as 80%. That raises the question as to whether universities and colleges are making as much money off of online higher education if 80% of it is going to a vendor but also whether they’re able to pass the lowest possible cost along to students. So that’s one area where there’s been an enormous amount of increase.
There’s also about $15 billion a year flowing to enrollment management consulting companies. Those are large and prominent EAB, Noel-Levitz, those kinds of companies are seeing a lot of money. Not all of them are for-profit – ACT and the College Board also make an enormous amount of money selling lists of student names that they get from test-takers and from other sources to admissions offices. So that’s another $15 billion. We’re very likely to see that number increase given the pressures on enrollment offices or admissions offices right now. It’s likely there’ll be leaning even more heavily on private enrollment management consulting firms. Educational technology also sucks up about $16 billion of budgets of universities and colleges. And again, when we’re talking about these billions, we’re talking about budgets that are already enormously constrained, especially now. Educational technology is not exclusively outsourced, but in many cases it is, and is another enormous cost for universities and colleges, and in many cases, a gamble. I can tell you as an adjunct member of the faculty at a university, I can just look around my classroom and it’s sort of like an archeological dig, and you can see the technology they bought that that was then replaced and bolted over with the new technology they bought, and then the new technology they bought after that. The university that I’ve taught at has moved from Canvas to Blackboard or the other way around, I can’t remember, and all of those are disruptive, they require training, and they’re very, very expensive. One interesting note about educational technology is that contrary to logic, we would have assumed that educational technology as an industry was having a wonderful year. They’re not. The issue has been that universities and colleges, in their scramble to go online, mostly went back to providers that they knew already, and that those were companies like Google. They have so dominated the educational technology sector that smaller educational technology firms, even who have really good ideas, really couldn’t get an inroad. What happened in the spring when the pandemic caused campuses to close is educational technology providers offered their services for free or at deep discounts, that they really didn’t have the capital to support. And so they began to run out of runway, and we’re going to see a lot of consolidation in the educational technology sector. That doesn’t mean that universities will be spending any less. It does portend that they might have to spend more as fewer players dominate the market.
Dan: I get that the pandemic has certainly propelled some of the shift, but your article does make it clear that this has been going on now for quite some time, quite a few years, perhaps even decades. I’m curious about that long-term transformation. What do you think is driving that transformation in the long-term? Is it efficiency? Is it effectiveness? Quality? Is it… Laziness?
Jon: I don’t know that the word ‘efficiency’ comes up much when you talk about higher education, to be honest. On the upside, the benefit of outsourcing for these universities and colleges, and what advocates suggest about it in ways that makes legitimate sense, is that a lot of these are services that are not at the core academic mission of the institution. Universities have grown to provide so many things – security, housing, dining, sustainability, bookstores, and fitness centers – all of those things are outside of the purview of teaching people things. And so there’s an argument to be made that outsourcing those services is a good idea dorms and dining principal among them. It’s also true that universities and colleges increasingly rely on those auxiliary services now for 13% of their budgets. That’s why this year has been such a big hit, because they lost all that money. I think that a lot of consumers think that dining and dorms are a breakeven proposition, and as you know, that’s not remotely true. So that’s been growing over the years when you raise the term ‘efficiency.’ And when I mentioned the argument that universities make that these are outside the central mission of the institutions, it’s also true. And it doesn’t take much analysis of IPEDS data to see that the number of employees at these universities and colleges has kept going up. So what exactly it is that they’re improving? I don’t know. So on the one hand, they keep adding people, and on the other hand, they’re outsourcing the services that presumably those people were supposedly in charge of providing. That’s something that I’m curious about, and when I’ve raised it in the reporting for the story we’re discussing, most people just laughed. It’s a reality of higher education that people just keep getting hired.
So that’s an argument that I think universities and colleges have made. I think there’s some legitimacy to it: “This isn’t what we’re here to do. We’re here to teach things to people.” You know, two-thirds of budgets of universities and colleges now have nothing to do with instruction, and so maybe there’s some effort here by outsourcing to refocus on the academic mission. That’s their argument. I’m not sure that I’m seeing that in the numbers of things like people on the payroll. The other really good argument they make is that sometimes outsourcing makes their lives more efficient. So if you talk to some of the enrollment management consulting companies, what some of them charge, especially at the smaller institutions, is less than the cost that a smaller institution would have to shell out to hire a data analytics person. Those are very expensive people. University enrollment management consultants can hire lots of them, and through economies of scale can contract their services out to lots of institutions at a price that they argue is lower than what the institution would have to spend. Having said that, I’ve spoken to a lot of enrollment managers who actually sometimes question the value of what they get for what they spend on enrollment management consulting, which as we noted at the outset is a $15 billion a year industry right now. One of the things that they get out of it, which has nothing at all to do with efficiency, is enrollment managers tell me quite candidly that their presidents are often more willing to listen to an outside consultant telling them exactly the same thing, than they are to listen to an admissions officer who already works on the campus. Whether that’s worth $15 billion a year, I don’t know.
Dan: Jon, it sounds like overall if you were asked the question of whether this transformation is a good thing or a bad thing, it sounds like overall you’re deeply skeptical of it. Am I right in saying that? Or is it just that we can find examples of where it’s good and where it’s bad and you can just take your pick?
Jon: So let me give you two answers to that question, and one will be a little bit of dissembling as a journalist. I don’t have an opinion, I can only relate to the opinions of the experts to whom I speak, but I will say that there’s a preponderance of thought that a lot of this money is wasted, it isn’t improving efficiency, and it’s duplicating what universities and colleges are doing already. The other reality of the pandemic is that not only did it accelerate outsourcing, it exposed the weaknesses of outsourcing. So there were two principal ways that that occurred. One is in public-private partnerships in which private developers built, or built and run, or in some cases simply run, university dorms. Students were not initially given refunds or were not allowed to get out of their leases even when the campuses were closed. That is unfair to students, but ultimately also cost universities more money because in states where that occurred, principally Maryland, it took until almost Christmas, but the private company and the public nonprofit financing agency through which the dorms were built in a very complicated kind of partnership, finally agreed to refund students’ money. Part of that cost will now have to be borne by the university that was trying to save money in the first place by doing it this way, and in the end is now obligated to pay money on top of everything else that it’s dealing with, that it didn’t expect to have to pay. In Georgia, the company that built and manages the dorms for many public universities pushed back when the Board of Regents wanted to limit occupancy as a measure to control COVID-19. The dorm said, “you can’t make us do that, that will affect our revenues, and that violates our contract.” So there was an argument made that that was endangering students’ lives for the sake of the revenue of the contractor. In the end, so many students didn’t show up anyway, that there was social distancing by rote. So it happened anyway, but in the process of doing that, what the development company managed to do is attract unanticipated scrutiny to the whole model of these private/public partnerships, and made the board of Regents realize that the contract that they had negotiated really constrained how they could run these dorms, since they weren’t running them anymore, a private company was doing it. It also elicited a letter from a couple of senators, including Elizabeth Warren, questioning these public/private partnerships and why universities, especially in both of these cases, public universities had entered into contracts with companies that were essentially telling students that they couldn’t have refunds when their colleges were closed in the public universities, in Maryland, making things even worse. The students who were in the dorms the university owns did get refunds, but the ones who were in the dorms that the university contracted with did not, and parents pointed out rightly that they had no idea that someone else owned these dorms because the dorms had the names of the universities on them, not the name of Capstone Development Company.
So that I think has elicited a lot of attention to this policy in this process, that universities and the private companies they contract with probably would have rather avoided. The other shortcoming of outsourcing that was exposed by the pandemic was the fact that contractors, in this case mostly dining and custodial companies, immediately stopped paying their employees when campuses closed in the spring. And that is also a very, very bad look. The other employees of the campuses who worked directly for the universities continued to be paid, but the ones who worked for – I’m making this just out of the air – I know that companies that do this service include Aramark and Sodexo, the likes of those companies. I’m not speaking specifically about those two, but those kinds of companies, in many cases, immediately stopped paying their employees because the dining halls had closed. This became such a hot problem for Harvard, and I believe the other one was the University of Pennsylvania, that they did agree to continue paying these employees, which of course was an additional cost to the universities. Other universities where there were contract employees did not pay them, so really bad optics for the universities; they look bad, universities are often presumed to be on a moral high ground. They looked like they were disadvantaging the lowest-paid and often people of color on their campuses when their dining halls closed and their outsourced contractors stopped paying. So those were a couple of the problems with that. I’m not sure that I entirely answered your question –I think you, you had also asked me about the history of this, it does, of course, precede the pandemic. I think we’ve seen it more clearly in the pandemic than we had before, but it has accelerated in the last few years leading up to the pandemic, but it has not really gone on that long. This is a fairly new phenomenon. I’m aware of some of the history of the enrollment management industry, because I wrote about it for a chapter of a book that that’s coming up from Harvard Education Press, not out yet, I think next year, about enrollment management and my assignment was to write about the history of enrollment management. It hasn’t been around that long. As an industry, it really got going in the mid 1990sas a concept there’s some dispute about who came up with it, but at the earliest, maybe in the 1970s, the idea of sort of leveraging financial aid and doing other things for the sake of enrollment management, but as an industry, it’s been around for about 25 years. How many industries have been around for 25 years, that now that are now in the tens of billions of dollars? So this is a new industry. All of these industries are fairly new. The outsourcing, I think, began with dining; the public/private partnerships happened in the 2010s. Some of the more recent ones are even more complex. They involve water and power facilities that are owned by universities that have now been handed over to private companies. The universities and colleges get a big lump sum at the beginning, which they invest with the hope that the proceeds from the investment will cover the price that they now have to pay to the new owner of the power plant or water treatment facility to provide those services to the campus. So there are a lot of questions about these, and, and although some of them were around at a low level, like bookstores, they have really accelerated in the last few years.
Dan: Speaking of that longer view, I’d like to give you the opportunity to return to the example of housing just because it’s one of the greatest costs in a student’s residential college experience. I worked at a school that used an outside, not-for-profit company to build and manage its dorms. And I also worked at a school that used an outside for-profit company to build and then manage its dorms. In the case of the not-for-profit company, the outcomes were good. In the case of the for-profit company, it frankly was a disaster. Poor construction, poor service to the students, and repeated expensive legal action by the college simply to get them to do what they had originally promised when the contract was awarded. Do either of my experiences dovetail with what you found in your research?
Jon: Yes, both of them do. I think that there are good examples and bad examples of this. I think there’s another player in the game here, especially at public universities that have moved to the public private partnership idea in places like California, the University of California-Merced was really big on this as an innovation. But it really was a response to the fact that capital funding has declined, and at public universities this is how you build a new dorm now. I mean, you can, you can issue more debt and that’s another issue, that’s another problem that universities have faced over the last 10 years, an enormous amount of borrowing. You can issue more debt and then the service on the debt, which is already almost 10 cents of every dollar paid by a university operating budget, you can go that route or you can have a private company develop your dorms and run them.
This also works with student unions, where the companies receive the student fees later in compensation. So with the caveat that there are dangers to the students as well, whether it’s a nonprofit or a for-profit model in terms of the developer students can’t get out of leases, they can’t go to the university for help when they have a problem. That often surprises them. Many of these partnerships are really hard to see. I wrote in the story about one of the more recent announcements of an OPM, which was Tufts University with Noodle announcing a couple of new programs in the fall. As you probably know, Noodle was founded by one of the original founders of 2U. And where 2U takes a commission, the Noodle model is a fee, which may be a better deal for the university. In this case, the university pays a fee for the course, and then a certain amount per credit hour of about $88, and it charges about $1,600 per credit hour. So clearly it’s making a ton of money off of this program. Nonetheless, if you go on the university website and look up the program, you do not see that it’s provided by somebody else. That’s another huge problem for this outsourcing that we heard from a number of consultants who watch this process. Universities and colleges who were using third parties to provide things like bootcamps, coding, bootcamps, hugely popular; Columbia and the University of Pennsylvania over the summer announced a new online coding bootcamp. It’s not run by them, it’s run by Trilogy, which is a division of 2U. 2U bought trilogy a few years ago. That is disclosed on the website, but what the consultants have said to me is there’s a big danger, there’s a huge risk for these universities. That if, as in the example that you gave me of the dorms, if consumers are unhappy with this product, it doesn’t reflect on the vendor. It reflects on the university. So if these coding bootcamps – and I have no reason to believe that they wouldn’t be of great quality if they’re being run by Columbia and the University of Pennsylvania – but if the vendor that is actually running the program doesn’t do a great job that’s up to their standards, that affects their brand. So that is also a growing danger.
Dan: Let’s stay with the example of 2U for my final question to you. I use them only because you’ve just been discussing them; I know that there are others that could be used as examples. So 2U is, according to your article, is now valued at nearly $3 billion. It runs more than 475 programs, including, as you said, bootcamps and certificate programs for more than 75 university partners. Its revenues grew 44% in the first quarter of 2020, 35% in the second quarter. And the company’s stock price is up from $17 to $40 since mid-March. You give other examples. I read that and I sort of assumed, naively perhaps, that kind of growth shows some level of institutional satisfaction, or at least buy-in; at least everybody believes it’s a mutually beneficial arrangement. How do you think we should conceptualize a for-profit educational company whose primary obligation is not to the students, but to their shareholders?
Jon: Well, I think you can also interpret that growth not necessarily as institutional satisfaction; perhaps there is institutional satisfaction. I think you’re gonna interpret that growth as desperation. I think you’re gonna interpret that growth as a lot of universities and colleges that dismissed online higher education for so long that by the time they wanted to add it, they needed somebody else to help them do it. 2U is the dominant player. Until a couple of years ago, they weren’t profitable because the cost actually of recruiting and marketing was very, very high, because students were slow to adopt some of these programs. I think that’s changed because of the pandemic. I know that student satisfaction with online higher education based on surveys during the pandemic has been very, very low. So I don’t know where this goes from here. I think a lot of universities just signed on because they needed revenue, they needed a presence in the online world, and I wonder because one of the other dangers with these OPM contracts is that they are very long. And so now they’re stuck. They are stuck with this deal for many years and whether they’re going to make money from it or not, I don’t know. The example of how 2U’s model works was presented at an investor presentation that we found access to. The university partner for a given program makes about six or seven million in revenue per year. And 2U makes about that same amount. So after having invested in the startups, they’re recouping original costs, but as somebody put it to me, when I was talking with them about this, lot of institutions see it as a percentage of something is better than nothing.
Their problem right now is that while they were kind of dawdling on online higher education, 1% of the players, the people that got into it at the outset which were at EdX and Arizona State and people like that, that 1% of providers now controls a quarter of the market. So it’s a really tough market to get into. It’s very expensive. They’re relying on the OPMs to do it for them. They’re perhaps making less money than if they could figure out a way to do it themselves. Their students aren’t saving any money on it because of all of this revenue that has to be shoveled to the OPM provider. If they jumped into it during the pandemic, because they were just panicked, now they’re stuck with a long-term contract. There was huge growth during the pandemic in the number of universities that signed new deals. I think there’ve been 51 new deals just since the beginning of 2020.
Dan: Based on your research, are there for-profit companies that you think are able to balance shareholder value with return to students, in terms of educational quality?
Jon: That’s a great question. As I noted earlier, I’m not expert enough to really give you a straightforward answer to that question. I think is the most important takeaway here is that these companies are beholden to shareholders. They’re beholden to creditors, because in many cases, the model includes borrowing to pay for a privately sourced development that is then recouped from student fees. That’s what happened in Maryland with the public/private partnership for housing. There were creditors that also had to be satisfied. That’s a huge problem this year. I think that we’re not seeing yet, or we won’t see until the financial documents come out, about how many universities and colleges were in debt for even building their own dorms debt that they cannot now repay through student fees that they’re not collecting. So the issue is that you’re beholden not to a board of trustees or a legislature or governor, or in the case of a private university, to your students or their families or their alumni or your board. You’re beholden to shareholders. You’re beholden to creditors. In some cases, especially in the enrollment management industry, much of the enrollment management industry is capitalized by venture capital companies. You know, they don’t do that out of charity. So you also need to provide returns to funds. Those are different constituencies than universities and colleges have had traditionally.
Dan: My guest today is Jon Marcus, higher education editor at the Hechinger Report, who also writes for the Washington Post, the New York Times, the Boston Globe, Wired, Medium.com, and others. You can follow him on Twitter @jonmarcusboston. Jon, thanks for being with me today.
Jon: My pleasure. Thanks again for having me on.