Profit, Not-for-profit higher education, why it should not matter.

Posted on 19/08/2014

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There is a relatively constant and accepted view that higher education should be not-for-profit and that for profit institutions are necessarily bad. I always wondered why we have this specific view for higher education, largely endorsed by the media. One of the main reasons I think is that we consider education as a common good, which should benefit to all and as such, that money should not be an issue and that no individuals or private companies should gain money from a common good.

But, if we take health as an example, it is also a common good, and it does not appear to be an issue that private companies and shareholders are making profits. What is then the difference? In the health industry, progress in the quality is visibly achieved regularly, in the form of new treatments, increasing the life expectancy. In the case of higher education, for profit is often associated with low or medium quality. While being a private or public higher education institution does not mean anything in terms of quality, with some countries where “private” higher education is of higher quality, as evidenced by the international accreditations and rankings, profit or not-for-profit is related to quality. In the US, most of the well-known for profit providers are associated with low quality, borderline diploma mills. Accreditations are minimal. The only example I found of an accredited for profit venture is the Laureate-University of Liverpool online MBA, which is AACSB accredited. But it is the only example up to my knowledge in all of Laureate operations and it could have been dictated by the University of Liverpool agenda.

Traditionally, for profit providers in higher education have been looking for rather high returns, with profits around 15 to 20% whereas most institutions of high quality run with profits from 7% to 0%… In 2013, ESSEC, one of the best business schools in the world, has even posted a deficit of 7 million € for a budget of 109 million (but it seems to be due to investments and to provisions for extra taxes). Some institutions, due to their legal structures, could also not report any benefit from one year to another, so the incentive to generate a profit was nonexistent.

Furthermore, so far, profit or not-for-profit has not shown any difference in the main issue: the access to the best higher education, which is still mainly dependent on the socio-economic status and wealth of the parents.

Will that change? Traditional investors are more and more interested by higher education as it brings a steady if not very high return and as it is a steady or growing industry in many countries. Parents will always pay to send their kids to study, or students will take loans (see the current debates in the US or in Australia). Many countries or institutions give also access to grants or subsidies, although it is not enough. As investors become interested, they tend to invest in second-tier institutions, with the potential for reshuffling, streamlining of the operations, to make them more profitable. For example, in 2013, APAX Partners bought the French INSEEC group for 200 million €, which belonged for the past 10 years to the US based CEC. While we may guess that CEC was looking for high immediate returns, we can infer that APAX will look more for a 5 to 7 years investment and sell it with a profit. Currently, in order to go up the rankings in the French context, INSEEC is at a stage where it needs to invest into research and go for international accreditations (AACSB, EQUIS,…). It will be interesting to see how they reach these money consuming targets while achieving the financial targets of their investor.

I believe that there is room for for-profit quality higher education as there is room for for-profit quality products and services in most of the other industries. When you buy a Cartier piece of jewelry or a Louis Vuitton bag, you not only buy the brand, you also pay for the quality and durability of the product. And there are industries where companies achieved to offer decent quality, a reasonable cost and make profits. Air Asia in the airline industry would be an example, or Toyota in the automobile industry. It means that higher education must move out of the traditional middle aged way of thinking about the industry to benchmark what is done in other industries: streamline when useful, go global, develop more alliances on common products, outsource, merge, why not try to create blue oceans (see the MINERVA venture for a current attempt to change the industry). It basically means applying to the industry what is taught in the classroom and stop being the poorly shod shoemaker…

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