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Institutions

MOOC platforms are the new startups. Nobody really knows how it will all turn out, but  these are experiments that need to be given time, space, and dollars to to incubate innovation.  But what exactly does that mean?  And what models are available to institutions that want to try to create such safe spaces for innovation?

The vision of  Al Capp’s Skonkworks, perched on the edge of Skunk Hollow, belching the byproducts of producing exquisite joy juice has been a metaphor for three generations of inventors. When it comes to skunkworks, there are ideas to try out and ideas to avoid.    New developments like MOOCs exist to bend perceptions and blur boundaries, so using traditional perceptions and boundaries to explore MOOC potential doesn’t make a lot of sense.

This is the third in a series of reposts that talk about lessons learned from other startups — in particular startups that are born within existing organizations.  The first post put us face-to-face with an oftentimes hostile culture.  In today’s post we talk about successful exits from hostile environments and how to make sure that what began in a skunkworks has a chance of succeeding once the thrill of invention has subsided.

What constitutes a successful exit in Online Education? The question that is always asked is “How will all this investment in online courses be monetized?”  I think most people who ask don’t really know what they are asking for.  They are really asking a different question: what is the value of what you have created?  How do I extract value? A successful exit needs to answer this question.

***

It’s not only the clash of investment cultures that tends to doom internal start ups. At least that’s what I told the Bellcore and SAIC CEOs at the post-mortem for the internal division that we had tried to run as a venture-backed business.

It’s also what I said to Bob — who you will recall — wanted to incubate an internal venture inside his Fortune 10 company that would match in excitement and star power the coolest gang of Sand Hill Road funded misfits. He would have to be willing to sacrifice a boatload of management principles that had served him well in his career. I didn’t think he would do that.

Like a generous parent, Bob was in a position to give the new kids everything they needed for success: mentoring, time to succeed, and ample resources. What he did not have was a clear idea of which exit to take. Bob’s idea of a venture failed the value test.  A new venture succeeds when the right leadership team focuses on a market need with staged funding.  The idea was doomed as soon as Bob said,“Look, I’m in charge of new technology and platforms and I’m going to be the venture capitalist funding a new product, so that when it succeeds we’ll be able to fold it back into our current business.

The moment someone in a large company forms a thought like this, the options for maximizing the value of the investment are narrowed to one.  The only exit is one in  which access to internal resources can be used to shoehorn a fit into existing businesses. I had seen the danger of this kind of investment strategy at other companies, and the results were not encouraging. This thinking had infected our Bellcore start-up, but I have been in the executive suites of a dozen West Coast technology companies when the discussion turned to how the value of an internal start up was going to be captured by an existing business line.  It always turned out the same:  because there were no choices to a successful exit, backers literally threw money at the new company. They were thinking way down the line about how to succeed.

There are other options, but they do not necessarily align well with Bob’s goal of internal commercialization:

  1. Sell the technology: it’s always possible that the upside does not justify continued investment.  But if you’ve made a large up front commitment–as opposed to small increments that are tied to market tests– it is hard to execute this option and capture value.
  2. Licensing: the main reason for choosing  licensing as an exit is that there are differing value expectations in the marketplace.  The technology may be used in many different applications by many different players, for example.  You can maintain a central IP position and benefit from this diversity.
  3. Resell your R&D effort: if the technology is a critical product component, there may be other vendors who would like to benefit from your near-term “deliverables.” An R&D contract gives up a little IP in the short run, but you not only recover your development costs, you also continue to expand what you know about the technology and its applications. This is such an interesting–and seldom used–exit strategy that it deserves a post all by itself.  Watch for it!
  4. Sell the right to market or form a joint venture to market and sell: this is a range of exit possibilities that allow you to keep the option of bringing the technology in-house at some later point.  Of course, the attractive thing about such partnerships is that they generate revenue while spreading the risk around several players.
  5. Spin-out/IPO: the obvious counterpoint to the internal start up is to kick the baby bird out of the nest to see if he can fly on his own. I don’t know why our Bellcore start up was not conceived from day one as a spin out.  Bellcore, after all, had a history of spinning out companies to commercialize research technologies.  Some of those companies (Telelogue for voice menus, Elity for CM analytics, and a host of companies for communication network traffic monitoring and tools) were quickly picked up by angel and venture investors who went on to ride the businesses to their own successful exits.

Why Bob was determined to retain ownership in an incubated business says as much about internal corporate culture and priorities as Bob’s own approach to innovation. What seems to be missing when managers fixate on internal startups is the recognition that there are other worlds involved in the success of a new business, and they often  have very different rules.The internal start up is an opportunity for worlds to interact rather than collide. Here is the value chain that Bob had to work with:

  • Creative engineering: internal R&D interacts with a larger, external innovation community.  It  is very good at coming up with gap-filling concepts that need to be externally validated
  • Venture funding: is useful for establising performance metrics based on value and focusing funding to meet performance goals based on those metrics
  • Corporate resources: the company itself is in the driver’s seat.  It sets out the strategy for value capture and makes the option calls that start chains of transactions that are key to success. And by the way, the creative engineers call it home.

This all started because Bob was worrying that normal, internal product R&D would not lead to  “breakthrough product ideas that do not align well with their core business.”  It is a common problem, but there are three fatal errors that doom most attempts to solve it. Here’s how to avoid those errors.

First, don’t set the new venture up for failure by limiting the end game to only those ideas that align well with the core business.  That was what got you in trouble in the first place, and can be avoided by considering up front the full range of exit options.

Second, don’t pretend that you are a venture fund.  The fundamental belief systems are different, and it is simply not possible for a large corporation–one that has to worry about quarterly results and long-term growth–to capture value in the same way that a VC does.

Finally, recognize the role that interacting worlds will play in the success of your venture.  External innovation networks, market-validating communities and the relatively heavier weight corporate resources and processes have a tendency to collide, when what is really needed is a strategy for working together.

MOOC platforms are the new startups. Nobody really knows how it will all turn out, but  these are experiments that need to be given time, space, and dollars to to incubate innovation.  But what exactly does that mean?  And what models are available to institutions that want to try to create such safe spaces for innovation?

The vision of  Al Capp’s Skonkworks, perched on the edge of Skunk Hollow, belching the byproducts of producing exquisite joy juice has been a metaphor for three generations of inventors. When it comes to skunkworks, there are ideas to try out and ideas to avoid.    New developments like MOOCs exist to bend perceptions and blur boundaries, so using traditional perceptions and boundaries to explore MOOC potential doesn’t make a lot of sense.

This is the second in a series of reposts that talk about lessons learned from other startups — in particular startups that are born within existing organizations.  The first post put us face-to-face with an oftentimes hostile culture.  In today’s post we see the conflicting agendas of important stakeholders.

***

Internal start-ups have all of the usual new business challenges.  They need products, customers, and a profitable way of getting customers to pay for the products.  But above all, they need cash, because even the best strategy will crash and burn if money runs out too soon.

[Production note: at this point investors should enter, corporate investors stage left, venture capitalists stage right]. They speak the same language and are genuinely interested in incubating  great new businesses, but don’t let that fool you.  They are from different worlds.

promised to talk about some of the things that doomed the Bellcore internal start-up which I briefly led.  There is no way of  knowing whether a VC-funded company would have fared any better. In fact, one of the companies that we might have merged with was a venture-funded operation that lasted only a few months longer than we did.  Nevertheless, we did learn a lesson or two about corporate sponsorship of start-ups:

Corporate sponsors of new ventures and VCs have different belief systems.  They are fundamentally incompatible, and without early, explicit steps to stop it, corporate attitudes, practices, and beliefs will overwhelm the fragile culture of the start-up.

Let me set the stage a bit.  In 1999, Bellcore (now Telcordia Technologies) was a small company (revenue creeping up on two billion dollars) that was trying to ride the internet wave, but it had inherited a corporate style from its previous owners that was, well, hierarchical.  Big deals dominated the business mix, and internal investment decisions were obsessively analytical.

Bellcore’s new owner was SAIC, a big company serving a hierarchical marketplace that was paradoxically entrepreneurial. Bob Beyster, SAIC’s founder, had insisted on a flat corporate structure in which managers were encouraged to develop independent business.  When my little start-up failed, I  made my wrap-up presentation to the CEOs of both companies.  One of them tended to believe that Bellcore’s internal investment machinery was the right way to grow a new business.  Here’s how it went.

  1. We spent a lot of  money on extensive analytics to gauge market potential.  It was how the investment decisions for Bellcore’s big operations support systems were made and every new round of funding was based on a rosy prediction of a complex market study. In reality, market behavior was unpredictable.  We should have evolved our concepts in the market.
  2. Except for the few top  technologists that I could steal from my own research staff, corporate investors would not permit top talent to be redirected from existing projects — where the  big customers were —  to this risky venture with uncertain prospects. Once both scale and success were clear, we could recruit internally, but until then, we had to rely on good-natured volunteers to help us out.  The only thing we could do was hire externally, but there was little upside to attract the kind of business team that we needed.  A VC sponsor would have known that new ventures do not succeed without a highly talented team.
  3. Speaking of success: the corporate sponsors were only interested if the likelihood of success was high, so we spent a lot of time on the success factors that would be convincing to them.  An angel investor or a VC would have known that, since the likelihood of success of a given venture is quite low, it is better to fail earlier rather than later.
  4. Corporate culture was a culture of ownership, so many business planning meeting focused on patents and intellectual property rights that would build walls around the business.  It was an unfortunate mindset.  This was a time of open standards and sharing, but shared ownership was not part of the equation for our start-up.
  5. Internal sponsors wanted to see scale.  Niche markets were simply not interesting. The business had to embrace all of telecommunications, so part of the operating strategy was to place many product bets simultaneously, a disastrous choice given the meager resources for product development and the lack of real experience on the part of our business development team.  A VC would have told us that a narrow, easily explainable, product focus was key to success.
  6. The corporate sponsors were all senior Bellcore executives, and they were focused on building the core businesses.  They believed that value creation had to be demonstrated by earnings. A VC would have told them that the market recognizes value well before earnings are even possible — it’s the single most obvious characteristic of early-stage investors to constantly seek those kinds of  market signals.

There were ways through this thicket.  That is one of the lessons for corporate leaders who want to launch internal start-ups: avoid colliding worlds by choosing the right corporate role.  Corporate sponsors need to be responsive to the needs of the new venture, but proactive support is just one more opportunity to infect the start-up an alien culture.  An internal start-up needs to be managed, but managing for value makes much more sense than managing to artificial revenue and earnings targets. And freaking out over the possibility of failure is also not helpful.  New business creation is a portfolio game, and any corporation that does not take a portfolio approach is betting against high odds.

An overlay to the story of every internal start-up is corporate machinery.  The milestones that mark the calendar for corporate sponsors are timed to fit the needs of much larger — and more visible — core businesses.  No billion dollar company can afford make its processes dependent on external business and market events.  But that is exactly what a start-up needs to do.  So, even if the new venture survives the Investor vs. Investor duel, it needs protection from the calendar, the  topic for my next post.

Next: Heading for the Exit

This post was originally published on When Worlds Collide on 9/29/2010

Dilbert.com

This is a repost inspired by the explosion of new innovation models for MOOCs and how universities should organize to create safe spaces for experimentation. My suggestion is to look closely at the lessons from the commercial sector (see my previous post)

***

I had a conversation the other day with a senior executive — let’s call him Bob —  of a Fortune 10 company about their “internal start-up” culture. It seems that they are looking for breakthrough product ideas that do not align well with their core business.  The solution seems obvious: let’s create the same kind of  exciting, market-driven environment that you would find in a start-up!

Everything sounded fine for a few minutes.  They thought that the most creative people in the organization needed to have elbow room that would be difficult to achieve in the risk-averse culture of a hundred billion dollar company.  So how did they plan to achieve that?

  • Freedom to break some rules:  the start-up can use its own  product roadmaps and sales strategies
  • Freedom from process-driven corporate calendars and budgets: the leadership of the start-up is not bound by the revenue and earnings goals of their parent
  • Freedom to take risks: they have permission to fail

It didn’t take long for the discussion to go seriously off track.  When I started in with questions about how they were going to actually pull this off, Bob said: “Look, I’m in charge of new technology and platforms and I’m going to be the venture capitalist funding a new product, so that when it succeeds we’ll be able to fold it back into our current business.” I had seen this movie before.  It’s called When Worlds Collide. When I suggested that Bob lives on a different world and would make a terrible venture capitalist, things got a little heated. As I recall it, Bob said, “In your ear!” A surefire way to put a fine point on your argument.

Bob lives on a planet where the scale of his business creates a climate for successful development of new products that can be sold to familiar customers using existing channels and tried-and-true processes.  Above all, in Bob’s world, it is possible to make big bets. The examples are impressive. Everything from HP’s inkjet printing to the Boeing 777. Unfortunately for Bob and his start-up, none of those things matter.  The start-up lives in a world of new markets, which means new customers, new channels and new processes.

Even though Bob has all the talent he needs for market success,  the likelihood of failure is high. The Newton and the Factory of the Future did not fail because  because Apple and GE could not innovate.  They failed in large measure because corporations foster a system of beliefs that is fundamentally incompatible with  taking capabilities to new markets. When I asked Bob  how the start-up employees were going to be recruiteed and rewarded, whether they had a safety net for returning to the company in case of failure, and how many simultaneous bets he was willing to place, the answers were not encouraging.

I immediately did a deep dive into my archives, hoping to find traces of a long-forgotten venture that I helped steer into the ground.  In the late 1990s Bellcore was poised to enter the online services business, hoping to attract newer, smaller customers than the seven  Regional Bell Operating Companies who accounted for most of the company’s revenue.  This was a time when Bellcore’s Applied Research group was generating a blizzard of patents in e-commerce and software, technology that I have talked about before. We were as smart and nimble as any West Coast start-up, and best of all we had the cash to fund a new venture, the talent to staff it, and the power of an existing sales team to go after those new customers. I was asked to lead the new company.  We would be funded just like a VC-backed start-up…

When the dust settled and I reported lessons learned to the Bellcore’s CEO Richard Smith and later to Bob Beyster, CEO of SAIC,  Bellcore’s parent company, the first thing I said was that there had been no structural reason for failure.  A team from McKinsey had already given us the range of possibilities. We could have set up an independent business unit or spun 0ut a company in which we retained minority ownership.  Setting up a new incubator would have required more time than we thought we had, and, in any event,  Applied Research was already in the incubation business. We had chosen to bypass corporate reporting structure and create a company-within-a-company with direct oversight by a CEO who was committed to our success.  It was exactly the Hughes DirecTV model.

There are three reasons that internal start-ups like ours tend to fail.  Bob was not in the mood to listen because he is banking on success, but the topic comes up in every large enterprise, so I thought it might be a good time to repeat the conclusions here:

  1. Failure is common: Building new business is a portfolio game in which 90% of the returns come from 15% of the investments.  It is fundamentally unlike product development. A “big bet” strategy only succeeds when there is high degree of confidence in your ability to sort out winners and losers.  In a new market, that just never happens.
  2. Market-driven milestones drive success in new ventures.  An internal start-up — even one with strong support at the top — cannot divorce itself from processes that are timed to fit corporate needs.
  3. Corporate sponsors of new ventures and VCs have different belief systems.  They are fundamentally incompatible, and without early, explicit steps to stop it, corporate attitudes, practices, and beliefs will overwhelm the fragile culture of the start-up.

I will be elaborating on these ideas.  I hope Bob is reading.

Next: Investor vs Investor

This post was originally published on When Worlds Collide on 9/22/2010

MOOC platforms are the new startups.  Literally. We are closing in on a half billion dollars pouring into online education companies like Coursera, Udacity, and edX. Tens of millions of dollars are flying out the door of places like MIT, Stanford and U Penn to produce new instructional materials.

Nobody really knows how it will all turn out, but  these are experiments that need to be given time, space, and dollars to to incubate innovation.  But what exactly does that mean?  And what models are available to institutions that want to try to create such safe spaces for innovation?

When the residents of Al Capp’s mystical, mythical Uncertain Hamlet of Dogpatch needed to brew up a batch of Kickapoo Joy Juice, they did on the edge of town.  It was a smelly, messy process and the factory was better suited to the environs of Skunk Hollow — “worse than the badlands” — than the otherwise proper City of Dogpatch.  By the way, being worse than the badlands is a real black mark because in the Badlands “it’s no good here.”

The vision of Skonkworks, perched on the edge of Skunk Hollow, belching the byproducts of producing exquisite joy juice has been a metaphor for internal innovation ever since.

The approach at Georgia Tech has been to create an internal laboratory to try things out. Other places have tasked educational technology groups, CETLs, or distance education departments.  They are all  Skunkworks.  Just don’t call them internal startups. That is a sure path to failure.

When it comes to skunkworks, there are ideas to try out and ideas to avoid.  A colleague of mine once started a discussion by saying, “Let’s begin by figuring out what the administration will allow us to do.”  What a terrible idea — a rookie error. It defines your design space by all kinds of parameters that have nothing to do with success.

But it is easy to fall into this kind of trap.  There are plenty of examples of “internal startups” that failed in exactly this way.  It’s not just that online courses at elite campuses are brewing their own brand of joy juice.  New developments like MOOCs exist to bend perceptions and blur boundaries, so using traditional perceptions and boundaries to explore MOOC potential doesn’t make a lot of sense.

I want to repost a series of articles I wrote last year about this topic.   I think the lessons apply to academia.

Next:  The Internal Startup

OK, so it’s one thing to know what forces are driving tuition increases.  It’s another thing to know where money is being spent.   That is a problem of different proportions because universities do not report their spending in neat categories like

  • cost of scaling beyond capacity
  • making up for lost subsidies
  • cross-subsidies with loss leaders

And, as The Delta Project’s Jane Wellman is  fond of pointing out,  there is no category representing value that ends up on a student’s diploma.

It’s not a completely satisfactory approach, but you can look that the “Where does the money go?” in question in two ways.

The Accounting View

As I pointed out in a previous post, overall spending has not substantially increased — even as tuition has risen.  What has increased is spending in the following categories:

  • institutional grant aid
  • public service and research
  • energy
  • facilities
  • contingent faculty
  • residence hall operations
  • groundskeeping
  • online
  • admin
  • bookstore
  • general staffing
  • financial services

These are interesting categories because increases in these areas generally compensates for decreased spending in others.  Take contingent faculty, for example. Increased spending for part-time or adjunct professors compensates for an overall reduction in tenure-track faculty. Contingent faculty carry  a completely different cost platform.  In many cases health care costs can be trimmed by reducing the number of full-time faculty. adjunct professors do not require expensive startup packages. Capital requirements also change, because office and lab demands are not the same.

This brings us to a second way of tracking dollars: what behaviors result in large shifts in spending priorities.

The Behavioral View

Behaviors are interesting because you can imagine controlling them.  Here are the behaviors that institutions report as affecting their current spending priorities.

  • Making up for lost revenue
  •  Lost productivity
  •  Capital expenditures
  •  Cost of non-core activities
  •  Administrative bloat
  •  Giving it away
  •  Compliance
  •  Health Care and other costs of an aging workforce
  •  Unquantified “quality”
  • Overshooting markets like internationalization
  • Stealing revenue  from academic programs
  • Operational inefficiency
  • High cost of materials
  • inappropriate skills utilization

There are others of course.  Stanford president John Hennessey has recently pointed to labor costs tied to the professorate drive cost increases, but I can’t find anyone who will show me a price increase that is due to increased faculty costs.

I can find examples of capital projects where initial funding plans have collapsed. Few of these projects are drop-dead institutional requirements.  There are a fair number of vanity projects and many examples of non-core activities like athletic practice facilities or mixed-use facilities that were once thought be revenue-producing opportunities but for which a real market never materialized.  When funding profiles change dramatically, one response might be to re-evaluate the need for a new building, but that rarely happens.

This is a true money pit.  There are really only three sources of discretionary revenue: tuition, government allocations, and private gifts. One way to make up for lost revenue is to increase income from other sources.  In most cases, this means tuition.

Critics seem hell-bent to fabricate exotic reasons that college tuition is rising. “It is a market response to free-flowing federal dollars”, say some.  “It is a conspiracy,” say others. “Declining productivity!” say those who are convinced that college professors are overpaid and underworked.

The 2011 annual spending report of the Delta Project on Postsecondary Education Costs, Productivity, and Accountability — the last annual report issued by Delta before it sadly closed its doors last spring — makes it clear that easy answers are likely to be wrong:

There is much public discussion and concern over rising tuition but much less attention to the intricate relationships among tuition and revenue sources–particularly state and local appropriations in the public sector — and spending.

Take the issue of lost appropriations, for example. It is true that from 1999 to 2009 tuition at public research universities rose at a much higher rate (56%) than the 32% increase at their private counterparts.  These increases are almost entirely explained by the loss of state appropriates, as opposed, say, to increased spending.

All other factors are incidental. Nor does the rate of increase tell the whole story, because private universities are starting from a much higher base for their sticker prices the average dollar increase at the private institutions was three times that of the private universities.  The situation is much worse at public community colleges which have seen the greatest increase in enrollment. This is because, when it comes to tuition, even small changes in enrollment headcount have a big effect on prices. And that is where capacity comes into play.

Private universities have been able to keep their increases in check because they do not accept as many students as they could otherwise afford.  The increasing enrollment pressures have been absorbed by community colleges, and public masters and research universities. Students, who cannot afford to attend private institutions flock to quality public universities.  These are the very institutions that have not added capacity over the last forty years.

It is seductive but entirely false to think of higher education as a single sided market — that is, a system in which there is a supplier of goods and services to a customer who is willing to pay a price determined by the marginal cost of production.  That is not higher education.  Higher education is a multi-sided market, a collection of stakeholders with often competing interests and cross subsidies that make it difficult to determine fair pricing schemes.

Local newspapers were a multi- sided market,  in which extremely profitable classified advertising subsidized news, subscriber fees, and print advertising.  It was a system that worked well until Craig’s List came along an undermined the whole value proposition that supported local news.  The result was rapidly dropping classified ad revenue, rapidly increasing print ad rates followed by a corresponding drop in demand for print ad, and ultimately a cash crisis in which subscribers fled to other media for their local news.  Newspapers were slow to recognize that they were a three-sided market. 

Higher education is taking the same path, and that is significant because it helps explain why the lack of capacity in American universities lies at the root of cost increases.

Success in a multi-sided market is determined by platform success in which a single horizontal layer allows many stakeholders to share common services at a total cost that is less than the cost of offering those same services in a vertically integrated business.

A multi-sided business without a scalable platform eventually succumbs to the nonlinear costs of growth.  Not only do the various services have to work out pairwise agreements with the other services, but individual stakeholders must also do the same.  As the number of stakeholders grow the overall cost of providing services grows in proportion to the ad hoc arrangements needed to keep everyone happy.

Universities have not invested in platform scalability for at least the last fifty years. Their processes and structures are locked into a set of capacity assumptions that are falling by the wayside. And they are rewarded for growing in a market where students seeking value are fleeing lesser institutions for those that are already overcrowded.

The obvious losers are the second and third tier institutions who desperately need students.  These are the schools that offer the steepest discounts. So steep that they cannot sustain them without falling into the financial danger zone I have talked about before.

The other losers are the students who are driven to higher quality by increasing prices.  Which institutions are they?  They are the very universities which have not added capacity but which have incentives to continue growing.

It is growth that comes at nonlinear costs.  There are no easy ways for most institutions to subsidize or cross-subsidize those costs, so they are passed on to students.

Next:  Where does the money go?

What is Driving Up the Cost of College?“, asked the question that many outside and inside academia want to know the answer to — especially this time of year as families contemplate writing college tuition checks that over four years will top $200,000   According to a recent Pew poll, the majority of Americans believe that a college education is becoming unaffordable and want to know why. Facile explanations are easy to come by, but there are few that match the facts.

So what’s going on?  Much of the popular discussion of tuition increases is based on three  “facts” that  are not true.  They may be easy to toss off on editorial pages or cable talk shows, but they are myths.

Myth 1: The rate of college tuition increases is abnormally high.

If you listen to many commentators, college tuition is hyper-inflationary.  In fact, students at many public campuses have seen tuition and fees double over the last decade, and–as the stubbornly persistent effects of the recession strain family budgets–become increasingly unaffordable.

Affordability is a real problem and prices are on an unsustainable path, but it is not the case that we are in the middle of some hyper-inflationary bubble.

In normal times, tuition rises at roughly twice the rate of inflation.  From 1958-1996 that averaged somewhere near 8%.  For most of those years, the increases were offset by increased spending for financial aid and by general growth in personal income, which hid many of the most serious consequences of this rise in prices.

Recent years are different, some argue. Let’s take a look at that claim. Annual inflation for 2011 was 3.16%, but that actually understates inflation for the months in which trustees and legislative committees approve tuition increases. The  annual rate of inflation for the last three quarters of 2011 was just under 3.5%.

Private institutions  raised their prices last year, but the rate of increase was actually in line with inflation.   2011-2012 tuition increases at nonprofit private institutions averaged around 4%.  For-profits increased their prices  3.6%. When it comes to holding the line on prices, these institutions actually performed much better than historical trends.

Public universities raised their prices at the much more dramatic rate of 8.6%, 20% above historical highs of the decade 1992-2001.

In short, the only increases that are above historical highs are at public universities, but only by a relatively modest amount.

Myth 2:  Easy availability of Federally-backed student loans is driving tuition increases.

This is a myth with many political consequences, but there is very little evidence that it is true.

The theory behind this myth is that a free market will cause prices to rise in proportion to a market’s ability to pay those prices, and the widespread availability of federal loans affects a student’s ability to pay.  The often unstated political corollary to this theory is that the students who are least able to pay are also the ones who are least likely to complete their degrees and pay back the loans.

In reality, the part of the higher education market that has control over its prices has been demonstrably immune from any such affect.

Less than 40% of all Federal aid is in the form of student loans (the rest is used for Pell grants and merit-based support).  These loans are distributed to public, non-profit and for-profit institutions, but for-profits tend to get a disproportionately large percentage of these loans.   These are the institutions that have raised their fees the least.

The remaining loans are distributed to nonprofit and public institutions, but since non-profits have also had historically low tuition increases, all of the factors affecting tuition would have to be concentrated in the sector that has the least flexibility in setting its own prices — the public colleges and universities. And as we have seen prices when viewed as a multiple of consumer price increases have risen only 20% faster than historical averages at these institutions.

Public institutions cannot retain earnings, so costs would have to have risen in proportion to loan availability, but that has not been the case.  Costs at public universities have been constant for several years.

So why have prices increased? In fact, total state support for public institutions dropped 7.5% in 2011-12. The total increase in tuition can be attributed to making up for lost income. Federal loan availability may be correlated with tuition increases but there is no reason for believing it is a cause.

Myth 3: Tuition rises because of declining productivity.  Professors are earning more and teaching less.

Productivity is not easy to measure in academia, but one thing is certain: unproductive professors are not a contributing factor to rising tuition.

One popular measure is the average ratio of students to faculty in general education courses.  This number has risen significantly at public universities whose state budgets have been squeezed.  In many industries this would be the very definition of increased productivity, which would mean that rich professors are skimming the cream off the top of rising revenues.

That is not true.  Faculty salaries have been stagnant at public colleges for almost a decade.  Many large state institutions have resorted to hiring part-time or “contingent” faculty to satisfy increased demand, which further depresses average annual compensation.

Another  measure of productivity is the number of courses taught per semester.  This number has been on a slight decline for over a decade, which might indicate that prices are going up even as productivity is decreasing.

However, the decline in average teaching load has been most noticeable at schools that are building sponsored research programs.  As I have pointed out in prior posts, sponsored research seldom pays for itself, so a decline in teaching loads represents, not  a productivity decrease, but rather a shifting of costs from academic programs to another income producing activity but one which often fails to cover even its own costs.

Next:  Three Reasons that Tuition is Rising: Capacity, Capacity Capacity