REENGINEERING THE UNIVERSITY: HOW TO BE MISSION CENTERED, MARKET SMART, AND MARGIN CONSCIOUS

William F. MassyProfessor Emeritus, Stanford University

Presentation at Southern New Hampshire UniversityNovember 16, 2016

Overview• Balancing Margin with Mission and Market

• Mission – The university’s ‘“Intrinsic’ Value Proposition”• Market – The university’s “’Customer’ Value Proposition”• Margin – Difference between program revenue and program cost

• Introduction to Reengineering• Flaws in the “Academic Business Model” and portfolios of initiatives

• The New Scholarship of Teaching• How to deliver more learning while containing cost

• Activity and Cost Models• How to get critical data at the needed level of detail

• Ways to Achieve Better Budgeting• How to build comprehensive and sustainable solutions

• Q & A

Balancing Margin with Mission and MarketQ: Why all the attention to margin? Why now?A: Margin is a key variable for mission-centered universities,

but NOT because they should put money above academic values.

Margin data provide unique and important insights about:• Where mission conflicts with market forces• How choices in prior years reflect mission priorities• How forward-looking choices can better reflect mission priorities

To see how this works, compare what happens, in steady state, to (net) margins in not-for-profit universities to what happens in for-profit ones.

• Not-for-profits: Positive margins are invested in high-value activities that are losing money.

• For-profits: Positive margins are distributed to shareholdersand money-losing programs are shut down.

The Two Results Stem from Different Business Models

Counter-intuitively, in not-for-profits, negative margins imply high incremental value and conversely.

$0

R C

M

M

CR

Money makers

Money Losers

Not-for-profitsMaximize Value,

which requires, for each program, that

Incremental Value equals

Incremental Margin, and, also, that the

Budget is Balanced.

For-profitsMaximize Profit,

which requires, for each program, that

Incremental Revenueequals

Incremental Cost.

$0

R C

M

Money makers

Money losers

Poof

Unprofitable programs are

soon eliminated

How Value Maximization Works: Budget Tableau and Value Frontier after Maximizing Mission Attainment

The dots represent requests for funding, listed in priority order (up is better) with margin on the horizontal axis. Green dots indicate requests that have been accepted. The curves

approximate “Incremental Value = Incremental Margin” for three budget limits.

Source: Massy 2016, Fig. G-1

Better

Concluding Thoughts about Margins• Without margin data for academic programs and individual

courses: • Provosts, deans, and faculty can’t understand the true impact of

changing curricular requirements and course offerings, or adding, resizing, or eliminating programs.

• They have insufficient perspective about the financial aspects of course redesign.

• They can’t judge how well they have balanced mission with money in the past or learn to do better in the future.

• But margin data by itself can be dangerous• Increasing margins can become a goal in itself.• Margins can blind decision makers to the quality of the school’s teaching

and scholarship.• Therefore, in addition to margin, schools need detailed information about

production processes—especially as they affect quality.

Introduction to Reengineering:Flaws in the “Academic Business Model”

These flaws stand in the way of “delivering better learning, consistently, at scale, at affordable cost”

Weak understanding of the “teaching production

function”

Over-decentralization of teaching activity

Lack of good learning metrics

Dissociation of educational quality from

teaching cost

?

Building Blocks for Portfolios of Initiatives Redesign of teaching; Activity & cost analysis; Better budgeting

The New Scholarship of TeachingLearning science

Service science

Systems thinking

Departmental Teaching

Improvement Portfolios

Generally Accepted Learning

Assessment Principles

PLAN

DOCHECK

ADJUST

“Kaizen”: continuous

improvement

Academic QualityWork

Course RedesignOn-line learning objects

Course Redesign

Course redesign shows that faculty can improve teaching quality while containing cost when they have the right tools and are motivated to do so.

Faculty teams address the important elements of teaching productivity: course content, teaching processes, quality of learning, resource utilization, and cost—including:

When well done, the result almost always is improved learning at lower cost.

Faculty teams

• Learning objectives and metrics• Use of technology and the “New scholarship of

Teaching”• Resource utilization and cost analysis spreadsheets• Calls on outside expertise where necessary

Activity and Cost Models

It turns out that Enhanced Activity Based Costing (E-ABC) can do the job.• E-ABC adds a structural model of teaching

production to course-based ABC.• The result is a “Decision Support Model”

(DSM) for academic decision making.• Most U.S. schools already have most of the

data needed to build the model.• The model has been implemented at a dozen

Australian unis, at the University of California – Riverside, and at a number of other schools.

How can we make the key variables from course redesign available for all courses, all the time?

Help improve course & curricular designs

Help determine

which courses to offer

Help understand the effects of enrollment changes

Inform conversations about budgets

Report activity, cost & revenue

data on courses & degree programs

Stimulate faculty work on learning

metrics

Enhanced ABC

Enhanced ABC provides the data needed to contain cost without sacrificing quality. It also can provide the “dislodging stimulus” needed to motivate

education quality work.

Outputs from Enhanced ABCActivity Variables Cost & Revenue Variables

Delivery mode (e.g., F2F, on-line, hybrid) and types of sections

Direct costs of teaching: total, per section, per student, per credit hour

Student headcount: in-state/out-of-state; student level (LD, UD, GR)

Direct revenue (e.g., tuition & fees): total, per section, per student, per credit hour

Numbers of primary and secondary sections, by type (e.g. lectures, labs)

Gross margin generated: total, per section, per student, per credit hour

Average class size by section type, and groupings of sections by size category

Full costs (i.e., including allocated overhead) and net margins

Personnel hours used, by kind of activity and teacher type

Costs, revenues, and gross margins for degree and certificate programs

Percent of room capacity utilized Incremental direct costs for adding a certain number of students

Quality-Related Variables (Not available in Version 1.0, but with a clear development path.)

Student attrition, grades and/or pass rates in this course and downstream

Faculty-generated learning measures as they become available

All results pertain to individual courses, with rollup available to higher organizational units.

Transaction data are brought together to produce a comprehensive model

using Pilbara Group’s E-ABC technology or equivalent.

Queries of department chairs supply data on the ratios of un-timetabled

activities to timetabled ones, plus an overall faculty time distribution

Enhanced ABC was not feasible until the advent of on-line timetabling and other system improvements.

• Timetabling• Student registration• General ledger• Human resources• Facilities management systems

• Class preparation, etc. to teacher contact time

• Grading, etc., to class sizes• Ratio of teaching to research effort• Administration and other fixed effort

How These Outputs Are Produced

Development opportunities for

modeling on-line course activities

Some Problems Identifiable from Activity Data• Class Sizes that are too large: can degrade quality• Class Sizes that are too small: excessive numbers of small

courses limit capacity• Overuse of Adjunct Faculty: can degrade quality• Course Completion Rates: failure to complete a course

delays graduation and increases cost• Effects of Enrollment Change: often drive the above• Curricular Complexity: increases cost and time to degree• Faculty Course Load: uncontrolled variations can reduce

instructional capacity, increase costs, or degrade quality• Few courses with unconventional configurations: may

suggest a lack of attention to innovationResource scarcity makes these problems more acute.

Ways to Achieve Better Budgeting

Envisioning Information

Strategic Finance

Enlightened Allocation

• Dashboards for activities and people, mission attainment, market performance, and financial results

• Separation of history, current, and forecast (>3 years) periods; proper identification of controllable and uncontrollable variables

• Financial sustainability: attention to growth rates and hidden liabilities

• Management of financial and operating risk• Coherent and complete processes: e.g., all

funds budgeting• Separation of tuition and allocation decisions

-> preset budget limits

• Allocation processes that consider both mission and margin (as described earlier)

For further information, see William F. Massy, Reengineering the University: How to Be Mission Centered, Market Smart, and Margin Conscious (The Johns Hopkins

University Press, 2016).