A number of years ago, a colleague and I were doing a Board/Top Management Team intervention at a major diversified multinational. It was interesting in that the firm was fairly financially successful but was struggling in key businesses. It also was in search of a strategy that pulled its businesses together – a common purpose if you will. The origins of the company went back a hundred years and over that time it acquired many different businesses in many different regions. However, while successful overall, it was falling behind across a range of businesses to more focused competitors – many of whom had de-conglomerated over the years. A key point in these meetings occurred when we asked the heads of the businesses two questions. One was to look to their neighbours in the room and explain in 3 minutes what they had done in the last year or two that made that other executive’s business better? None were able to come up with anything meaningful other than a few references to ‘synergies’ and administrative efficiency. The second question was what occupies most of their intercompany meetings (like the one they were in)? The answer was twofold: budgets (who earned what and who got what and “contributions to the HQ”) and the search for ‘synergies’/cost efficiencies? Ultimately, we asked them: “and how has that worked out”? Answer: Not well (otherwise why would they even be in this meeting). We then asked them, do you think you would be better off as an independent company or as part of a more focused organisation (e.g., sold off to a focused competitor). All of them, went dead silent.
If we use this example and think of our university structures, it brings up a host of questions?
First, why are all these parts together? The answer, for the most part, is history, along with government policy that makes the higher education system a protected and subsidized industry. Sure, there is some ‘competition’, but the reality is this competition is tiered and limited (the same players are ‘elite’ and have dominated for nearly a century). Much of the competition is within national boundaries (except at the very top) and over competition for government funding. No one is going bankrupt. No one is being broken up. No one is being taken over by private equity. As there are no shareholders (and a gazillion stakeholders), there is no shareholder revolt demanding change as we see in the corporate environment all the time. There are not many who could question, materially, the senior university executive on their strategy as, lacking real owners, it is never clear where their accountability as managers really resides.
Second, as government quasi controls the industry as part of the quid pro quo for protection insurance, it emphasizes the need for local socio-political outcomes. We see this all the time in terms of various initiatives (e.g., industrial policies, grand challenges, levelling up, national priorities in grant funding, etc.), to which the universities turn their attention like sunflowers seeking the sun’s rays. In addition, the government wants to have a say on local pricing because that is a key political constituency and demands ‘value for money’ (note that it could care less when the student is foreign, as that is not their constituency and any surplus from non-voting foreigners subsides voting local students and their parents). As with all protected industries (think the airlines of the 1960s and 1970s), just granting local oligopoly power is not necessarily good government policy, if all it does is lead to higher prices for the ‘voters’. So the government wants an oligopoly that it can use.
Third, why do universities in this form survive? This is an interesting question since the prior two points would put universities into the category of bloated conglomerate dinosaurs ready for the picking by smaller, nimbler, and efficient players. Yet, they are quite financially successful. The answer is really three-fold. First, as noted, governments view their university systems as socially necessary and hence protect them from foreign competition. Therefore, it is rare that foreign educational institutions can gain a foothold locally (e.g., the failure of UNSW Asia) except for when they are either politically strategic (e.g., US universities in UAE) and/or focused on a key constituency (e.g., INSEAD Singapore). Generally, foreign expansion fails because the foreign institution becomes regulatorily captured and, therefore, goes a bit native to survive (losing the value of its internationality). Second, universities do not have shareholders demanding dividends and hence divert internal surpluses to growth, maintaining cross subsidies, and expanding bureaucratic power. All reflect classic oligopolistic conglomerate behaviours. Third, while the elite capture most of the rents (e.g., like in OPEC or the Premier League), it may be that the non-elite players are significantly disadvantaged because the normal levers of competition are not available to them (they are usually bought off by cross organisation subsidies). Again, we see classic oligopolistic outcomes in that the organisations do not switch places very often. In the case of the universities, the elite of the 1950s are the elite of the 2022s.
The point of this discussion is to emphasize the oligopolistic conglomerate nature of the higher education industry. What we know from decades of research is that these types of industries are less innovative, less efficient, create less value and can be replaced if there is a willingness to allow others to compete to replace them.
The empirical evidence across nearly every industry shows that the more monopolistic and industry the less it innovates as its efforts are aimed at rent extraction over rent creation. Apple, Dell and Microsoft dealt a near death blow to the likes of IBM and a real death blow in the case of 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 while the deregulation of banks opened up massive opportunities such as we now see in fintech. The deregulation of telecoms has allowed for dramatic expansion of communication services.
We also know that conglomerates are more bureaucratic and inefficient and maintain structures with no logical sense via cross-subsidization. In the university setting, I always ask the question “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?” There is no doubt that the higher education industry has been subject to radical structural changes in demand and technology. However, the structure of the university has barely changed in 100 years. No organization – short of the established religions – has kept the same structure for so long or believed that the structure that made them successful in the past is the one that will make them successful in the future. In this sense, the university structures we have are simply not fit for the 21st Century.
Of course, it is one thing to argue a point and another to see it implemented. In this regard, what might we do?
The first is to think outside the box. For example, why does ‘levelling up’ have to be dependent on the existing university structures? Might it not pay to have a Turing Institute of the North? Or a world class business school operating outside the Northern university structures (perhaps paying a dividend back)? Might not the government pay to encourage universities becoming platforms that own infrastructure but do not control the components (allowing schools and faculties to form new structures on their own and decided what infrastructure they are to use?).
The second is to think differently about university ownership and investment. It is interesting that the Augar Report was written by someone from the financial sector but said nothing about the ownership, governance, investment, and organisational structures that drive the financial sectors involvement with their clients seeking change. Indeed, if we want a world class higher education sector fit for the 21st Century, the best way to do it is not to throw good money after bad and demand that old structures do new things. But to throw good money at new and innovative options that would never be put on the table by those who benefit from marginal increments of the status quo. As I point out all the time, government commissions do not answer to future politicians but current politicians and those who benefit from marginal change. Finally, nothing I am saying would require all universities to be broken up but force the old university model to compete with alternatives – what in management parlance is called “business model competition”. Many years ago, I did a consulting project looking at the efficiency of state mental institutions – the belief being they were less efficient than private institutions. However, what I found was that state institutions were just as efficient as private institutions when there were private institutions geographically close enough to be an alternative for the patients. Hence, it is not necessary to destroy the system to save it, but it can be made much better by providing alternatives arising from entrepreneurial initiative rather than relying on tweaks to a model that has revealed all its limitations.
A variant of this article is published in The Times Higher Education (30 March 2022). View it here.
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