Wednesday, September 5, 2012

When should a business not use the business model?

Recently I've written two posts about the use of the business model by entities that some do not consider businesses. Most recently, I wrote a post that implicitly referenced the model of a church as a business serving consumers (church attendees), and the understanding that a church was therefore obligated to meet the needs of its consumers.

That's a topic for another time.

Today I draw your attention to something that I wrote in July about universities. The post began with a (fake) commencement speech:

I stand before the graduatating class of Nonexistent University. As you leave these hallowed halls, I trust that you will remember the valuable lessons that you learned here. I could speak of the love of learning that you have received at this institution, or I could speak of the value of the pursuit of knowledge. But I will not speak about that.

I could speak about the non-academic aspects of your time at this university. The long talks at two in the morning. The wild parties. That night in that co-ed's room that you thought that no one knew about. But I will not speak about that.

Because, as you leave these hallowed halls, you will learn what is important. And it's not knowledge that's important, and it's not the college experience that's important.

What's important is that this university has to make money, however it can.

When you evaluate a university in business terms, then you use certain metrics in place of others.

Now some may argue that a school should be measured by the number of Rhodes Scholars, but we all know that a school should be measured by something far more important - its endowment.

It probably doesn't surprise you to learn that some educators - those who believe in the purity of their mission - are disturbed by this. One such disturbed individual - whoops, I didn't write that correctly - is Peter Katopes, who in 2009 was vice president for academic affairs at LaGuardia Community College of the City University of New York. Here are a couple of exercepts from an article that Katopes wrote:

[T]he business model, which prizes “customer satisfaction” or “efficiency” above all else, has led in higher education to an imbalance in the relation between student and institution, has led to a culture of entitlement and instant gratification, and has causal ties to the current fiscal crisis.

How does this tie to the fiscal crisis? Katopes explains:

Currently the nation faces an economic crisis the likes of which most of us have only had nightmares about. We as a nation have the lowest savings rate and highest personal debt of any industrialized nation. We have been taught for more than 30 years that we are entitled to get what we want when we want it. The sub-prime horror has been a result of a sense of this entitlement which pervades society at all levels: the top, the middle, the bottom.

I suspect, however, that the problem is not with the business model. The problem is with the application of the business model - namely, the timeframe used when making business decisions.

It's a fact that company executives (and church leaders and university governing bodies) will make different decisions based upon the timeframe in question. If your goal is to maximize profit during the next fiscal year (or the next twelve months of offerings, or the next academic year), then you'll make one type of decision. If your goal is to meet your numbers for the months, you'll make a different decision.

But if your goal is to maximize the value of your company (or church or university) over the next fifty years, your decisions will be different.

Of course, one problem with making long-term decisions is that you are making them based upon really bad information. Let's say that you were a state planner in Cuba in the 1980s, and you were trying to chart the future of the country over the next fifty years. Let's say that you were even able to make some intelligent assumptions about what would happen to Cuba in the years after Fidel Castro. But could any Cuban planner have predicted that in 1991, both imports and exports would drop by 80 percent?

Not that I'm comparing a university to Communist Cuba - OK, maybe I am - but when using a long-term horizon, the university must determine what will allow the university to thrive fifty years from now. And while the endowment may still be important, other things will come to the fore, such as the ability of the university to adapt to future demands. Let me take an example from Katopes:

The business model is imposed, for example, when otherwise worthy academic programs are eliminated based on low enrollment alone since they couldn’t possibly be academically valuable if they don’t attract throngs...

But what if there is a chance that the program may attract throngs fifty years from now? Is it worthwhile for a university to continue a course of study on the chance that it may become relevant again?

Oh, and back to Katopes. He is still at LaGuardia Community College, where they are saying interesting things about him:

Under Dr. Katopes’ leadership, the College has attracted funding support for a wide-range of programs from both government sources and private foundations. Working closely with the College’s Department of Mathematics in 2008-09, Dr. Katopes helped garner over $4 million in grants from the U.S. Department of Education to support experimental pedagogies that have improved students’ basic skills math scores.

I hope he refused the money. You can't sully the image of your institution by allowing yourself to be bought by the Federal Government, you know.
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