Universities must be forced to compete with alternative models

A number of years ago, a colleague and I did an intervention with the board and senior management of a major diversified multinational company.

In its hundred years of operation, the company had acquired many different businesses in many different regions. And while it was successful overall, a range of these businesses were falling behind to more focused competitors. It was in search of a strategy that pulled all its businesses together – a common purpose, if you will.

In the meetings, we asked the heads of the businesses to do two key things. One was to explain to their neighbours in the room, in three minutes, what they had done in the past year or two that made that other executive’s business better; there were no meaningful answers. The other was to tell us what occupies most of their intercompany meetings; the answer was budgets and the search for “synergies” and cost efficiencies. How had that worked out? Not well. So would they be better off as independent companies? Dead silence.

What if we asked these questions of university deans? Do their faculties benefit from being all together in one institution? If not, why are they still together? Who really benefits from the structure and who pays the costs?

The answers are partly history, but mostly relate to government subsidies, which insulate public higher education from market forces. Sure, there is some “competition” between institutions, but it is tiered and limited; much of it is within national boundaries and over government funding. The same “elite” players continue to dominate. No one is going bankrupt. No one is being taken over by private equity. No one is being broken up.

Moreover, since universities have no shareholders (and a gazillion stakeholders), there is no shareholder revolt demanding change. Internal surpluses continue to be diverted into growth, cross-subsidies and expanding bureaucratic power. There are no real owners, so it is never clear where managers’ accountability for their strategies really resides.

In return for their protection, governments demand a level of control. We see this all the time in the various initiatives (industrial policies, grand challenges, levelling up) to which the universities turn their attention, like sunflowers seeking the sun’s rays. Politics also impels governments like the UK’s to largely dictate domestic pricing, although it is typically much less concerned about international fees, especially as any surplus from those can be used to keep the fees of voting students and their parents down.

All of this would put universities, if they were mainstream businesses, into the category of bloated, oligopolistic conglomerates. Decades of research across nearly every industry tells us that these types of industry are less innovative as their efforts are aimed at rent extraction rather than rent creation, and structures with no logical sense are maintained via cross-subsidisation.

Such dinosaurs can be picked off by smaller, nimbler, more efficient players if there is a willingness to allow full competition. In the computer industry, Apple, Dell and Microsoft dealt a near death blow to IBM and a real death blow to DEC. Amazon, Walmart, Costco and others wiped the floor with the major department stores. The deregulation of the airline industry spawned a boom in low-cost tourism.

Universities have certainly been subject to radical changes in demand and technology. However, their structure has barely changed in 100 years. No organisation – short of the established religions – has kept the same structure for so long or believed that the structure that made it successful in the past will make for success in the future.

So what is the real value of the university conglomerate? Or, more specifically, is the business school better off because the university has a physics department? And is the physics department better off because the university has a law school? Why do all these parts need to be together?

Perhaps government funding structures could be overhauled to encourage universities to become platforms that own infrastructure but do not control their academic components. This would allow schools and faculties to form new structures on their own and decide what infrastructure to use.

We should also think differently about university ownership and investment. It is interesting that the UK’s Augar report on university financing was written by someone from the financial sector but said nothing about this. The best way to achieve a higher education sector fit for the 21st century is to fund the kinds of innovative new options that would never be put on the table by those who benefit from marginal increments of the status quo – including current politicians, whose concerns are inevitably short term – rather than tinkering with pricing and loans.

This doesn’t mean breaking up all universities, but it does mean forcing them to compete with alternatives – in management parlance, to introduce “business model competition”.

Many years ago, I did a consulting project looking at the efficiency of state mental institutions. Contrary to expectations, I found that they were just as efficient as private institutions when there were private institutions geographically close enough to be an alternative for patients.

It is not necessary to destroy the system to save it. But the system could be made much better by providing alternatives that arise from entrepreneurial initiative rather than bureaucratic tweaks to a model that has revealed all its limitations.

Timothy M. Devinney is a professor and chair at the Alliance Manchester Business School.