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Normally collegial discussions took a nasty turn after I suggested that most universities lose money on sponsored research.

Incredulous: “I don’t believe it. My department tacks a 50% surcharge to all my contracts; how can they lose money?”

Defensive: “Here are all the reasons that doing research is a good thing, so what’s your point?

Defensive with an edge: “Why are you attacking research?

Let’s be be clear about it:  if it’s your institution’s mission to conduct research, then spending money on research makes perfect sense.  In fact, it would be irresponsible to deliberately starve a critical institutional objective like research.

On the other hand, there are not all that many universities with an explicit research mission.  But there is an accelerating trend among  primarily bachelor’s and master’s universities to become — as I recently saw proclaimed in a paid ad — the next great research university. The university that paid for the ad has absolutely no chance to become the next great research university.  Taxpayers are not asking for it.  Faculty are not interested. Students and parents don’t get it either.

The administration and trustees think it’s a great idea.  Research universities  are wealthy.  Scientific research requires new facilities and more faculty members.  Research attracts better students. Best of all, federal dollars are used to underwrite new and ambitious goals. Goals that would be out of reach as state funding shrinks. As often as not, the desire to mount a major research program is driven by a mistaken belief that sponsored research income can make up for shrinking budgets. It’s a deliberate and unfair confounding of scholarship and sponsored research

If your university is pushing you to write grant proposals to generate operating funds, then alarm bells should be going off.  Scholarship does not require sponsored research. Chasing research grants is a money-losing proposition that can  rob funds from academic programs.  It’s an important part of the mission of a research university, but for almost everyone else, it’s a bad idea.  It’s a little like shopping on Rodeo Drive:  there’s nothing there that you need, and if you have to ask how much it costs, you can’t afford it.

How is it possible to lose money on sponsored research?  After all, professor salaries are already paid for.  The university recovers indirect costs. Graduate and undergraduate students work cheap.

A better question is how can anyone at all can possibly make money on sponsored research. Many companies try, but few succeed.  A company that makes its living chasing government contracts might charge its sponsors at a rate that is 2-3 times actual salaries. Even at those rates, it is a rare contractor that manages to make any money at all.

On the other hand, a typical university strains to charge twice direct labor costs.  Many fail at that, but the underlying cost structure — the real costs — of commercial and academic research organizations are basically identical.  There is a widespread  but absolutely false assumption that underlying academic research costs are lower  because universities have all those smart professors just waiting to charge their time to government contracts. The gap between what universities charge and what sponsors are willing to pay commercial outfits is the difference between making a profit and losing a lot of money. Just like intercollegiate athletics, sponsored research programs tend to lose money by the fistful.

Let me say up front that the data to support this conclusion are not easy to come by.  Accounting is opaque. Sponsors know a lot about what they spend, but relatively little about what their contractors spend.  It is in nobody’s interest to make the whole system transparent.  But my conversations with senior research officers at well-respected research universities, paint a remarkably consistent picture.  With very few exceptions, it takes $2.50 to bring in every dollar of research funding.

Fortunately, the arithmetic is easy to do.  If you know the right questions to ask, you can find out how much sponsored research is costing your institution. Here are ten sure-fire ways to lose money on sponsored research. You do not need all of them to get to a negative 2.5:1 margin.  If you are clever just a couple will get you there.

  1. Reduce senior personnel productivity by 50%: university budgets are by and large determined by teaching loads, a measure of productivity. It is common to adjust the teaching loads of research-active faculty. Sometimes normal teaching loads are reduced by 50% or more.  It is, some argue, table stakes, but a reduced teaching load is time donated to sponsored research because funding agencies rarely compensate universities for academic year support.
  2. Hire extra help to make up for lost productivity: Courses still have to be offered, so departments hire adjuncts and part-time faculty.
  3. Do not build Cost of Sales  into the contract price: The sales cycle for even routine proposals can be  months or years.  Time spent in proposal development converts to revenue at an extraordinarily small rate. In nontechnical fields and the humanities where research support is rare, the likelihood of a winning proposal is essentially zero.
  4. Engage in profligate spending to hire promising stars: Hiring packages for highly sought-after faculty members can easily reach many millions of dollars.  A sort of hiring bonus, there is little evidence that this kind of up-front investment is ever justified on financial grounds.
  5. Make unsolicited offers to share costs: Explicit cost-sharing requirements were eliminated years ago at most federal agencies.  Nevertheless, grant and contract proposals still offer to pay part of the cost of carrying out a project.
  6. Allow sponsors to opt-out of paying the indirect  cost of research: An increasingly common practice is to sponsor a research project with a “gift” to the university.  Gifts are not generally subject to overhead cost recovery, so a university that agrees to such an arrangement has implicitly decided to subsidize legal, management, utility, communication, and other expenses, and
  7. Accept the argument that indirect costs are too high: The  meme among federal and industrial sponsors is that indirect costs are gold-plating that must be limited. Rather than believe their own accounting of actual costs of conducting research, they argue that universities, should limit how much they charge back to the sponsor.
  8. Build a new laboratory to house a future project: Sponsors argue that it is the university’s responsibility to have competitive facilities.  But that new building is paid for with endowment funds or scarce state building allocations that might have gone toward new classrooms or upgraded teaching labs.
  9. Offer to charge what you think the sponsor will pay, not what the research will cost:  Money is so tight at some funding agencies that program managers are told to set a (small) limit on the size of grants and proposals independent of the work that will be actually be required.
  10. Defray some of the management costs of the sponsoring agency: It has become so common that it is hardly noticed.  University researchers troop into badly-lit conference rooms to help program officers “make the case” to their management.
The list goes on. It is so easy to turn a sponsored research contract into a long-term commitment to spend money for which there is no conceivable offsetting income stream that institutions routinely chop up the costs and distribute them to dozens of interlocking administrative units.  The explosion in the number of research institutions has all the elements of an economic bubble.
  • It is motivated by a gauzy notion that all colleges and universities are entitled to federal research funds..
  • It is fed in the early stages by accounting practices that make it easy to subsidize large expenditures.
  • It has the cooperation of funding agencies who know that the rate of growth is not sustainable.

Virtually everyone involved in university research knows that the bubble will burst.  A colleague just showed me an email from his program director at a large federal research agency.  It said that — regardless of what he proposed — the agency was going to impose a fixed dollar amount limit on the size of its grants. But in order to win a grant, he had to promise to do more.  His solution: promise to do the impossible in two years instead of three.  Just like the famous Sydney Harris cartoon,  a miracle is required after two years. At least there would be enough money to pay the bills while a new grant proposal was being written.

There was a stir a couple of months ago when I pointed out that university research is by and large a money-losing proposition.  There are some ways to fix that, but, in the end, it all boils down to an institution’s mission.  Most universities expect professors to engage in scholarly activities, but externally sponsored research is a different proposition.

The number of research universities–that is, universities whose missions explicitly incorporate research, knowledge creation and economic impact–is quite small.  Even among AAU schools–a club that styles itself as the premier  association of universities “distinguishing themselves by the breadth and depth of their research programs”–sponsored research is an afterthought for many.  The bottom line is that for most colleges and universities research is mission creep. Sponsored research is driven in part by a mistaken belief that research funds are an effective way of supplementing operating budgets.

But it is not the only upside-down belief system at work in American universities.  There is a persistent argument in higher education circles that intercollegiate athletics is somehow good for a university. Big-time college football and basketball are unquestionably great entertainment.  There is simply no other way to explain a jam-packed 100,000 seat football stadium in middle of an otherwise deserted prairie. It is spectacle that translates well to television, too.

So it is not surprising that there are millions of enthusiastic supporters of collegiate athletics–fans proudly flying the colors of the local team from the antennas of their SUVs–who know literally nothing else about the institutions on which they lavish so much praise and attention.  They may not be alumni, parents, or students, but they are nevertheless  invested in the fortunes of their teams. They may not be able to name a single academic program offered by their favorite school, but they know the pedigrees, strengths, and weaknesses of every assistant coach.  It is the main reason that most university presidents think that intercollegiate athletics is a positive force for the university. The common phrase among presidents is that it is a “front porch” that “only expands the potential donor base and does not compete with academic fund raising.”

If that were true, it would be great for all.  The public gets to invest in higher education. The schools get a new source of revenue and the opportunity to advertise their academic programs to a new and otherwise unreachable audience. Applications go up.  Scholarships pour in. Everyone wins.  The problem is that university presidents know differently. The president of a major research university once showed me an email message he had just received from an alumnus:

…I don’t care about academics at all. And I don’t want you spend any of my money on it. The ONLY thing I care about is winning football games. And if you can’t get that right, I am not going to give you another penny.

It was not an unusual letter, and it depressed him. But I don’t think he read the same significance into it that I did. College athletics and the business of running a university are not synergistic.  Failure in athletics has an enormous negative financial impact on the university, but then so does success.

On October 7, 1916, John Heisman coached Georgia Tech to a 222-0 route of Cumberland College. Neither team made a first down. Tech scored on every possession.  Cumberland gained a total of 22 yards. The Cumberland players were mainly ringers from local farms and factories who–because Cumberland had disbanded its football program– were recruited specifically to play this game. The pounding must have been fierce. Late in the game the Cumberland quarterback fumbled the ball, and it landed in front of a Cumberland lineman. The quarterback yelled, “Pick up the ball!” The lineman yelled back, “You dropped it. Pick it up yourself!”

There is cosmic significance to both the game and the panic-laced exchange between the doomed Cumberland players.  Intercollegiate athletics is set up to insure lop-sided outcomes.  Not necessarily on the playing field, but on university ledgers. College sports is also a financial game where there are lots of fumbles, but it is in no one’s best interests to pounce on them. If you are not on the winning team–and there are not many of those–you are going to take a financial shellacking. And even if you are on the winning team, it may not turn out so well for you.

It has been known for a long time that the financial model underpinning major college sports is crumbling. A 2009 report of the Knight Commission concluded that

It is clear that the question for many presidents…is not whether the current model is sustainable but given the forces at work, how long it can be sustained.

Some powerhouse programs do indeed make money. Georgia Tech runs one of the most profitable football programs in the country. Despite spending $1,250 per student, its football program turned a $9.35 million profit last year, but Tech is operating in rarefied atmosphere.  A recent report of the NCAA on revenues and expenses for Division I intercollegiate athletic programs shows why. Only about half of the 119 bowl-eligible football programs make any money at all. With so many media agreements with so many conferences, covering so many holiday bowl games, this seems impossible, but it is nevertheless true.

The major bowl games—the so-called Bowl Championship Series games– generate tons of money, and that money is spread around to the other schools in the conference.  So are the losses.  And there is a lot of red ink among the 34 post season bowl games. Bloomberg News recently reported on the “You pick it up!” outcome for the Big East Conference:

Rutgers University celebrated its 8-4 record last football season with a trip to the St. Petersburg Bowl in Florida. Big East Conference schools got stuck with a $740,000 bill.

The Big East revenue sharing agreement also spreads bowl losses from South Florida ($428,000) and Connecticut ($430,000) across the remaining schools according to a formula that conference does not make public.

But that still leaves 60-70 football programs that operate in the black, and those programs—like Georgia Tech’s—surely generate enough money to help cash-strapped university budgets,  don’t they?

They don’t even come close. Net income from major sports does not go toward engineering scholarships or new language labs. It helps to offset other athletics expenses. According to the NCAA, 88% of the programs at bowl-eligible schools lose money.  The median loss in 2009 was $10 million.  The NCAA also noted an alarming trend. The number of profitable programs shrank from 25 in 2008 to 14 in 2009 and the revenue gap between profitable and unprofitable programs grew.

The University of Florida operates one of the most successful intercollegiate athletics programs in the country.  Those programs collectively lost $5.4 million in 2008-2009. Where do those losses go? Universities hate to use the work “subsidy” but that is exactly what happens in big-time college sports. The losses are subsidized by other sources of revenue, and, as I pointed out in my last post, American institutions have no new sources of revenue.

Some of those subsidies are tied up in not very obvious ways with university balance sheets. Building costs, for example, tend to be lumped together in capital fund raising campaigns. It is a conceit that -–however convenient—has a big impact on academic programs and students. A professor interviewed by the Knight Commission asked the obvious question:

What’s the justification for a public university directing sixty percent of its capital expenditures over an entire decade toward a non-academic auxiliary unit whose annual budget is only eight percent of the entire university?

The financial reporting for athletics is as opaque as it is for research.  The NCAA is aware of this and had been pushing hard for standard accounting practices, but that would make life difficult for those institutions that want to spin the wheel, hoping for a jackpot.

I was browsing college basketball games last weekend, when I stumbled onto a public service announcement from one of those 119  FBS schools. It was an ad touting a new $50 million basketball complex bearing the name of a prominent local family. I sat up.  “I know that name!” The donor had been courted for a new academic building just a few years before.  Not only was there going to be another $50 million spin of the wheel, it had come at the expense of an academic program. Some front porch.

Awhile ago, I mentioned India’s plan to create 27,000 new colleges and universities over the next decade.  Well, guess what?  I was wrong.  The number is now 35,600. Here’s what I said a year ago about Education Minister Sibal’s plan to expand India’s capacity in higher education:

What does this have to do with American colleges and universities? Just as low-cost, high value service industries have migrated to India, the higher education market in the US will also start to buy more educational services there as well.

So I was immediately drawn to yesterday’s Business Week article about California’s intention to make a quick lunch of its seed corn by cutting university spending $1.4B and the likely effect that snack will have on job growth and tax revenue.

Particularly striking to me was VC Robert Ackerman’s reaction to the massive and rapid expansion of higher education in Asia:

Right now, if I were the Chinese university system, I’d be running ads showing up on UC websites, recruiting students to universities in Beijing and Shanghai.

Now I am not a big fan of the proposition that value in higher education can be measured in dollars spent–if American institutions made better use of their budgets, then the resulting efficiencies would actually increase capacity–but there is little doubt that wholesale dismantling of universities across the country is a very bad idea.

We are shrinking university capacity at a time when India, China, Singapore and many other countries are  increasing theirs. India  alone will create 600 new research universities. China is increasing its capacity in research universities while the  U.S. has created one new research university this century: UC Merced.  Since Merced is part of the California system, its prospects are dimmer by the moment. Only a handful of new universities of any kind have been created in the U.S. since 1960, a period in which college enrollments have quadrupled.

Why is falling capacity so important? Because the worldwide market is growing, and we are systematically reducing our share of that market when economic competitors are  moving in the opposite direction. I leave it as  a homework exercise to determine what happens when an enterprise loses market share in a growing market.

Buon appetito!

There has been a lot of discussion surrounding my post about Ephemeralization of American Universities.  One of the solutions I advocate is concentrating resources where they matter most — and for most universities that is not in the first two years when increasingly commoditized, high quality content is available to replace ineffective bricks and mortar in-person classroom experiences. Many of my colleagues have argued that the classroom experience is not only pedagogically superior, it is what students value. That was an argument that always rang hollow to me.  It did not match my experience and many of colleagues agreed.

But my anecdotal reporting of experiences has limitations.  A new book by Richard Arum and Josipa Roksa puts some weight behind the proposition that during the first two years of college students learn little.  That does not mean the first two years has no value, but as the Ephemeralization pill experiment suggests, the value is much more likely to be social than academic.

Here’s how Jacques Steinberg describes it in his New York Times blog:

This is going to be a topic that generates a lot of heat.  Behind it all is the question: why are we spending such a large part of the higher ed dollar on that part of the college experience that returns the least value?

It’s one of my favorites. Tom Wolfe’s  June 8, 1970 New York Magazine article “Radical Chic: The Party at Lenny’s” is a dazzling piece of writing that never fails to alternatively enrage and inspire as layer by painful layer the dangers of “integrating new politics with tried and true social motifs…” are laid bare.  More than an essay, it’s a universal metaphor.

Everyone from the Black Panther anarchists who were guests in the Bernstein house (but apparently thought that his was the BERN-STEEN residence)  to Peter Duchin’s wife Charay (who bubbled “I’ve never met a Panther before–this is a first for me!”) comes away excoriated and diminished. Including Tom Wolfe.

My favorite passage is the brief exchange between Leonard Bernstein and Panther field marshal Don Cox:

“You can’t blueprint the future,” says Cox. “You mean you’re just going to wing it?” says Lenny.

It’s that way with every revolution, I suspect.  Events are set in motion. If they are dangerous enough, they attract attention and sometimes even smug support from fashionistas who cannot quite believe that outcomes are uncertain. Edupunk is like that. It’s an idea that sounds dangerous but somehow containable.  Flying close to that flame might actually be fun.

At least that’s what University of Virginia president Teresa Sullivan probably had in mind when

In a bow to the “Edupunks,” Sullivan explained that Virginia is incorporating student habits into its pedagogy.

“Radical Chic” came immediately to mind when she explained that a bow can be as cheap and impersonal as a $500 check at Lenny’s dinner party.   It’s  not exactly the  Jeffersonian embrace that you might expect from an institution like Virginia:

“flash seminars” alert students to an edgy topic — no examples of how edgy — that will be discussed in a professor’s living room. To raise the hype level, only the first 25 students who show up are allowed to participate in this non-credit-bearing activity.

A colleague of mine put an even finer point on the comparison:

“bow”,”hype level”, professor’s “living rooms”, “edgy topics”– the academy domesticates  the “bizarre acts” of flash behavior, clueless to its naffness.

It should come as no surprise to those of you who saw last week’s announcement or have been following the plans that Richard Barke, Bill Rouse and I have for an open seminar on “Transforming Academia” at Georgia Tech’s Tennenbaum Institute that that I am winding up the year thinking about big ideas in higher education.

In fact, right after Georgia Tech announced the creation of a Center for 21st Century Universities (C21U), I started getting phone calls and email. “What’s the point?” one writer said. “Won’t universities change over the next 40 years or so?”  “What’s your vision for the 21st Century?” asked one reporter. “Here’s an idea that you have to look at,” said a colleague.  “It will change everything.”  The whole point of C21U is that over a hundred years, everything will change, and–from our vantage point at the start of the century–we have no way of knowing which ideas matter.

There is one thing that history teaches us: the ideas we think are important and radical  and chic today have almost nothing to do with how things turn out. I thought it was fascinating that the first questions I got about C21U were the ones that Arthur Miller and Barbara Walters were asking at the Lenny’s the night that Cox, Miller, and the other “funky, natural, scraggly, wild…” representatives of a new order stepped into polite society.

Would a turn-of-the-last-century gathering of influencers actually recognize the ideas that would shape higher education over the next hundred years? The New Year is an occasion for lists, so here’s one: What are the three ideas that shaped higher education–for better or worse– in the 20th Century?

Why only three? After all, higher education went through massive changes from 1901 to 2000.  But I would argue that these changes were consequences of three big ideas.

  1. The University as a Factory: The first massive increase in funding for higher education came from John D. Rockefeller and Andrew Carnegie. They transformed American universities, but the great philanthropists were also industrialists.  They demanded that the chaos and debris of 19th century experimentation be swept away and replaced by fiscal and administrative discipline. The chaos was tamed, but the price was the creation of an institution that took in raw materials of a measurable grade and under the watchful eyes of managers and boards of directors produced graduates of a certain intellectual size and shape. Everything from standardized admissions testing, an obsession with measuring inputs, and a focus on classroom efficiencies to the layers of bureaucracy for administering an unwieldy system of accreditation stems from the demand of  philanthropic foundations that universities operate with factory-like discipline.
  2. The National Science Foundation: Before Vannevar Bush convinced Roosevelt and Truman to create a  taxpayer-supported, national version of the Carnegie Foundation, sponsored research played essentially no role in university operations. Over the next sixty years, the rate of  federal spending on university research rose nearly three times faster than the economy as a whole. NSF led the first explosion in federal funding, and it cause a shift in values at the nation’s universities that forever coupled scholarship with sponsored research.  The very idea of a research university was transformed in the process, and it soon engulfed the social sciences and the humanities in a new  multi-billion dollar industry that–in addition to the elite research universities–now reaches into the thousands of regional and community colleges whose missions have expanded to include research.
  3. The Multiversity: It was legendary University of California president Clark Kerr who observed in his 1963 lectures at Harvard that universities were no longer single communities, but had become the sometimes inconsistent homes to stakeholders who did not always share the same goals but needed to be supported and nurtured if the university in the 2oth century was to play the same national role that railroads did in the 19th century. Graduate and undergraduate education had to survive and prosper with medical and other professional schools, athletics, the arts and others. The idea of a multiversity coincided with the second great influx of money into higher education. Some say it was instrumental in the decline of the great public universities and the creeping missions of all institutions. At least in was the cause for abandoning forever the idea that money spent in the nation’s colleges and universities should end up in the classroom.

Nobody would have recognized these as the great ideas of the coming decades.  There would have been no Edupunk thrill in rubbing elbows with the bureaucrats who defined the “Carnegie unit ” or a future MIT dean who believed that scientific talent was a national treasure. The great institutions were as likely to be state universities–which were still small and wealthy–as private colleges.  Not one of the public universities on Raymond Hugh’s 1925 list of top 20 research universities is at the top of the  current U.S. News and World Report ranking of graduate programs. They were displaced by universities that did not even exist in 1901.

Before pulling out their checkbooks to support the new politics of higher education,  radical chic party guests would have wanted to know what the plan was. Clark Kerr would have told Lenny, “You can’t blueprint the future.”

Lenny would have been incredulous: “You mean you’re just going to wing it?”