The Problem with Departmental Revenue/Cost (non)Analysis

Originally published June 2017.
All across the country struggling colleges (and universities) are hiring one of several academic consulting firms to help them get a handle on their finances. The ACTUAL problem the institutions face is low enrollment but this is experienced as “this place costs too much to run” (because tuition revenue is below expenses) and like management everywhere their brains turn to cutting labor costs. In the absence of a vision for what the academic program should look like (or in the presence of an unwillingness to put such a vision on the table), they turn to consultants to help them identify where to cut academic programs. One element informing decisions about academic restructuring in general and instructional personnel in particular is the so-called program cost structure analysis.

The basic logic of this analysis is to identify all the faculty FTE that staffs courses in a given area, identify the compensation of these individuals and then add in the cost of the program’s share of administrative support and operating budget and then compare this with the “revenue” the unit generates through crediting a fraction of effective per student tuition for each credit hour earned by students in the program’s courses. Then we either subtract one from the other or form a ratio and characterize the program as “in the black” or “in the red” a “net revenue generator” or a “net cost center,” etc.

Distortion and Bias on the Cost Side

When such analyses use actual faculty salaries rather than average faculty salaries they bias the result by faculty seniority.  Since faculty are sometimes on leave and since senior faculty retire and get replaced by new assistant professors this introduces big year to year distortions that make comparisons problematic.

Suppose biology, for example, has had three senior retirements in recent years all of whom have been replaced by new junior faculty. If we look at the department 4 years back it looks very expensive, if we look at it today it looks very inexpensive.

Now, some will answer this observation saying you have to budget for the actuality of today. Point taken. But the stated purpose of this analysis is to understand the relationship between cost and demand.  We are trying to understand something about the liberal arts college of today. If we do the analysis and find that philosophy is more expensive per student than marketing but the reason is marketing is a brand new department that only just hired faculty last year and we make strategic long term decisions on the basis of this information we are going to be making mistakes.

The solution is simple: use weighted average cost that takes into account the actual distribution of the college faculty across pay levels.  This permits program to program comparisons unbiased on the cost-side of the equation.

Distortion and Bias on the Revenue Side

One piece of the demand and revenue side of the analysis is simply looking at student course registrations – how many students do we teach.

This is a fair measure and it’s not hard to zero in on how many students each faculty member has to teach each year to “pay their salary.” When I did this computation a few years ago it came in at around 95 per year.

But using aggregate course registrations as a measure of student interest is problematic.  Many courses in the curriculum have numerous prerequisites and many courses are mandated as part of various minors and majors and general education schemes. And some courses are scheduled in a manner that reduces the number of potential enrollees (not necessarily out of poor scheduling strategy: languages may need to meet 4 times per week, some courses have required labs and labs may need to take up an entire afternoon).

A course that has an absolute prerequisite will almost necessarily never have more students in it than the prerequisite. Departments and programs that are more hierarchical will offer more courses that are necessarily smaller.  Courses with no prerequisites have a natural advantage. English, for example, has dozens of courses with no prerequisites or only English 1 as a prerequisite, a course that every student is required to take.  This gives the English program a huge advantage over, say, biology or biochemistry.

Programs that manage to control general education requirements and get more of their courses to count for GE will have enrollment numbers inflated over “actual student interest.”

The Upshot

The bottom line is that there are a number of structural distortions that make credit hours generated an invalid measure of student interest, especially in comparisons among close cases.

When both the numerator and denominator in a metric are subject to biases moving in different directions the metric is not a valid measurement of what you think it is a measure of. Employing such a metric for comparisons between programs, development of curricular strategy, and ending instructors’ careers is, at best, problematic.

Sometimes an analysis has a data problem (“garbage in, garbage out”) and that’s probably true here. But the far more serious problem lies in the methodology.

How to Fix

There really is no excuse for not using average faculty compensation, unless we do not care about chopping out a part of the curriculum simply because of when we hired the faculty who teach it. The other problem is much hairier.  The very nature of knowledge affects the results here, as do contemporary ideas about assessment that encourage a pedagogical trajectory from “introduction” through “practice” to “mastery.” Taking into account how different programs manifest these is not easy.  But failing to take them into account undercuts the believability of one’s results.

Administrative Expansion and Faculty Contraction: Not a New Story

This article on the inordinate growth of higher ed administration was getting a lot of Twitter action yesterday though it’s from February. We wrote about it back then (“Who’s a Cost Center?“), but since it’s circulating again as a part of the conversation about the Starbucks tuition program, here it is again, in case you missed it. The report that spawned the article was done by the Delta Cost Project.

Personally, I’m REAL skeptical of buying into any claim Richard Vedder makes, but the interesting thing about this article is the broad array of strange bedfellows it draws on as sources.

The reported trend, assuming it holds up in the face of scrutiny, is unsurprising for several reasons. The regulatory environment for higher education has changed and the constellation of external organizations colleges and universities have to interface with has increased. 

The article notes with irony that that administrative growth has happened even while there’s been a shift from full time tenure track faculty to save money. What the author misses is the fact that part-time faculty require more supervision; the net effect is to save money from instructional budget but spend non-instructional money to supervise – that’s a predictable shift in resources.

But an even bigger part of the story, I think, is that administrators create the need for more administrators. One might imagine that many hands make for light work, but it’s the opposite. Anytime you hire a high level administrator you create new reporting relationships and the incentives are for the new person to grow her staff and budget. Administrators are not usually rewarded for thinning their part of the organization (except when it’s faculty).

By comparison, in the American system, hiring a new professor rarely has any long term effect on staff size. In exceptional circumstances, it means the hiring of an administrative assistant; more often it means brining in grants. But in any case instructional lines are generally part of a pool – a provost or dean can potentially take back a line when an incumbent leaves. Administrative lines are not usually treated that way. In fact, because administrative positions acquire reports and have clerical staff and are plugged into all manner of bureaucratic processes, when an incumbent leaves, replacement is almost certain.

Finally, no administrator ever succeeds by solving the problem she was hired to solve. If we hire a new dean of, say, sophomore retention, that administrator will survive long term not by solving sophomore problems but by discovering more of them. That pattern can be found across the institution. No one makes them self redundant. 

from HuffPost College

New Analysis Shows Problematic Boom In Higher Ed Administrators

New England Center for Investigative Reporting
By Jon Marcus

The number of non-academic administrative and professional employees at U.S. colleges and universities has more than doubled in the last 25 years, vastly outpacing the growth in the number of students or faculty, according to an analysis of federal figures.

The disproportionate increase in the number of university staffers who neither teach nor conduct research has continued unabated in more recent years, and slowed only slightly since the start of the economic downturn, during which time colleges and universities have contended that a dearth of resources forced them to sharply raise tuition.

In all, from 1987 until 2011-12—the most recent academic year for which comparable figures are available—universities and colleges collectively added 517,636 administrators and professional employees, or an average of 87 every working day, according to the analysis of federal figures, by the New England Center for Investigative Reporting in collaboration with the nonprofit, nonpartisan social-science research group the American Institutes for Research.

“There’s just a mind-boggling amount of money per student that’s being spent on administration,” said Andrew Gillen, a senior researcher at the institutes. “It raises a question of priorities.”

Universities have added these administrators and professional employees even as they’ve substantially shifted classroom teaching duties from full-time faculty to less-expensive part-time adjunct faculty and teaching assistants, the figures show.

“They’ve increased their hiring of part-time faculty to try and cut costs,” said Donna Desrochers, a principal researcher at the Delta Cost Project, which studies higher-education spending. “Yet other factors that are going on, including the hiring of these other types of non-academic employees, have undercut those savings.”

Part-time faculty and teaching assistants now account for half of instructional staffs at colleges and universities, up from one-third in 1987, the figures show.

During the same period, the number of administrators and professional staff has more than doubled. That’s a rate of increase more than twice as fast as the growth in the number of students.

It’s not possible to tell exactly how much the rise in administrators and professional employees has contributed to the increase in the cost of tuition and fees, which has also almost doubled in inflation-adjusted dollars since 1987 at four-year private, nonprofit universities and colleges, according to the College Board. Those costs have also nearly tripled at public four-year universities—a higher price rise than for any other sector of the economy in that period, including healthcare.

But critics say the unrelenting addition of administrators and professional staffs can’t help but to have driven this steep increase.

At the very least, they say, the continued hiring of nonacademic employees belies university presidents’ insistence that they are doing everything they can to improve efficiency and hold down costs.

“It’s a lie. It’s a lie. It’s a lie,” said Richard Vedder, an economist and director of the Center for College Affordability and Productivity.

“I wouldn’t buy a used car from a university president,” said Vedder. “They’ll say, ‘We’re making moves to cut costs,’ and mention something about energy-efficient lightbulbs, and ignore the new assistant to the assistant to the associate vice provost they just hired.”

The figures are particularly dramatic at private, nonprofit universities, whose numbers of administrators alone have doubled, while their numbers of professional employees have more than doubled.

Rather than improving productivity as measured by the ratio of employees to students, private universities have seen their productivity decline, adding 12 employees per 1,000 full-time students since 1987, the federal figures show.

“While the rest of the economy was shrinking overhead, higher education was investing heavily in more overhead,” said Robert Martin, an economist at Centre College in Kentucky who studies university finance who said staffing per students is a valid way to judge efficiency improvements or declines.

The ratio of nonacademic employees to faculty has also doubled. There are now two nonacademic employees at public and two and a half at private universities and colleges for every one full-time, tenure-track member of the faculty.

“In no other industry would overhead costs be allowed to grow at this rate—executives would lose their jobs,” analysts at the financial management firm Bain & Company wrote in a 2012 white paper for its clients and others about administrative spending in higher education.

Universities and university associations blame the increased hiring on such things as government regulations and demands from students and their families—including students who arrive unprepared for college-level work—for such services as remedial education, advising, and mental-health counseling.

“All of those things pile up, and contribute to this increase,” said Dan King, president of the American Association of University Administrators.

“I think there’s legitimate criticism” of the growth in hiring of administrators and other nonacademic employees, said King. “At the same time, you can’t lay all of the responsibility for that on the universities.”

There are “thousands” of regulations governing the distribution of financial aid alone, he said. “And probably every college or university that’s accredited, they’ve got at least one person with a major portion of their time dedicated to that, and in some cases whole office staffs. These aren’t bad things to do, but somebody’s got to do them.”

Since 1987, universities have also started or expanded departments devoted to marketing, diversity, disability, sustainability, security, environmental health, recruiting, technology, and fundraising, and added new majors and graduate and athletics programs, satellite campuses, and conference centers.

Some of these, they say—such as beefed-up fundraising and marketing offices—pay for themselves, and sustainability efforts save money through energy efficiency.

Others “often show up in student referenda, to build or add services,” said George Pernsteiner, president of the State Higher Education Executive Officers Association. “The students vote for them. Students and their families have asked for more, and are paying more to get it.”

Pressure to help students graduate more quickly—or at all—has also driven the increase in professional employees “to try to more effectively serve the students who are coming in today,” Pernsteiner said.

But naysayers point out that the doubling of administrative and professional staffs doesn’t seem to have improved universities’ performance. Since 2002, the proportion of four-year bachelor’s degree-seeking students who graduate within even six years, for instance, has barely inched up, from 55 percent to 58 percent, U.S. Department of Education figures show.

“If we have these huge spikes in student services spending or in other professional categories, we should see improvements in what they do, and I personally haven’t seen that,” Gillen said.

Martin said it’s true that adding services beyond teaching and research is fueling the growth of campus payrolls. But he said universities don’t have to provide those services themselves. “They can outsource them, the way that corporations do.”

To provide such things as security and counseling, said Martin, “You can hire outside firms, on a contract basis with competitive bidding. All these activities are a distraction from what the institution is supposed to be doing.”

Universities and colleges continued adding employees even after the beginning of the economic downturn, though at a slightly slower rate, the federal figures show.

“Institutions have said that they were hurting, so I would have thought that staffing overall would go down,” Desrochers said. “But it didn’t.”

There’s also been a massive hiring boom in central offices of public university systems and universities with more than one campus, according to the figures. The number of employees in central system offices has increased six-fold since 1987, and the number of administrators in them by a factor of more than 34.

One example, the central office of the California State University System, now has a budget bigger than those of three of the system’s 23 campuses.

“None of them have reduced campus administrative burdens at all,” said King, who said he is particularly frustrated by this trend. “They’ve added a layer of bureaucracy, and in 95 percent of the cases it’s an unnecessary bureaucracy and a counterproductive one.”

Centralization has been promoted as a way to reduce costs, but Vedder points out that it has not appeared to reduce the rate of hiring of administrators and professional staffs on campus—or of incessant spikes in tuition.

“It’s almost Orwellian,” said Vedder. “They’ll say, ‘We’ll save money if we centralize.’ Then they hire a provost or associate provost or an assistant business manager in charge of shared services, and then that person hires an assistant, and you end up with more people than you started with.”

In higher education, “Everyone now is a chief,” he said. “And there are a lot fewer Indians.”

This story was prepared by the New England Center for Investigative Reporting, a nonprofit news center based at Boston University and WGBH Radio/TV.

See Also

Scott Carlson. “Administrator Hiring Drove 28% Boom in Higher-Ed Work Force, Report Says,” Chronicle of Higher Education, February 5, 2014

Will $3 Coffee Kill $50,000 Tuitions?

An item in yesterday’s newspaper could have real long term significance for institutions like the one at which I work. The story was about Starbucks beginning to offer to pay college tuition for its employees. When I read the headline I was genuinely startled (“Starbucks to Provide Free College Tuition“). But then I read the fine print and found myself saying “oh, for some particular online degree at Arizona State, big deal, seems like a bit of bait and switch.”

But then I thought about it a little and noticed the numbers: 135,000 employees and around $500 per credit.  And then I read Joe Nocera’s opinion piece.  Now, critics have already pointed out problems with the program (16 June), but the Lumina Foundation representative quoted in the first article had it right: Starbucks is just the first company to do this and the programs will evolve. There’s a gigantic population in the US who basically cannot afford to go to college, period. And the jobs available to them without a college education are AT BEST jobs like Starbucks and Best Buy and on and on. If just a few of these companies go down this path, it could quickly become an important way to recruit and retain low wage, high aspiration workers and educational benefits like this will come to define the standard (both price and process) for a growing section of the higher education market.

And places like Arizona State’s online degree program are going to capture that market share. And a whole bunch of people and families that are assuming unholy amounts of debt to get a college education are going to start asking why they are paying around a thousand dollars per credit if it’s out there for half that.

It will be interesting to see how this unfolds, but it may well be that the company that convinced a world used to paying 50 cents for coffee served immediately to pay, instead, 3 dollars for a coffee they have to wait for, will convince a country full of aspiring young people NOT to consider paying 100-200 thousand dollars for an education.

This confirms a number I have arrived at by other means: unless we can figure out how to increase our productivity by about 100% (translating in practice into halving out price), we will be consigned to the proverbial dustbin of history. I think it can be done without replacing in-person education with all online degrees, but unless those of us in the in-person business start to get really serious about innovation, the only work left for us will be either producing online courses or tutoring kids who are enrolled in them.


Who’s a Cost Center? : The Higher Ed Work Force Report

The Delta Cost Project, a research group under the American Institutes for Research (AIR) that looks at higher education costs, has released a report titled “Labor Intensive or Labor Expensive? Changing Staffing and Compensation Patterns in Higher Education.” 


Unfortunately some of the analysis in the report is easy to misinterpret because it moves back and forth between headcount, FTE, and dollars. Sometimes a trend toward more part time employees looks like growth in workforce, sometimes not. Thus, their figure 1 (here truncated) might indicate growth in workforce at private master’s and bachelor’s institutions or it might reflect a shift from full time to part time employees.



Still, I think the report deserves a close reading and that the appropriate folks at my own institution should inquire about where we stand on each of the metrics described and then initiate some critical conversations on whether we are pleased or not by the answers.


But in any case, this quote : “You can’t blame faculty salaries for the rise in tuition. Faculty salaries were ‘essentially flat’ from 2000 to 2012, the report says” from the CoHE article below will probably engender some interesting conversations.


See Also

Props to Maia Averett for calling HuffPost to my attention.


Of Restaurant Chains and Higher Education

One need not be a sophisticated economist to see that distribution of American family income makes the high tuition/high discount business model of non-elite, non-public higher education unsustainable. Unfortunately, most of the innovative and entrepreneurial thinking that’s taking place in response to that is not, IMHO, very education friendly. But reciting the woes of HE in ever more graphic and data supported ways is like shooting fish in a barrel; real solution ideas are a little harder to come up with.
It will be interesting to see the comments Mr. Selingo’s blog post garners.

Ten Part Washington Post Series on Higher Education (2013)

Dylan Matthew’s ten-part series “TUITION’S TOO DAMN HIGH” on the Washington Post’s “WonkBLOGS” appeared this summer. Matthews is a young journalist new to the education beat.  Some criticism of the series emphasized its “book report” quality (in contrast to “real reporting”), but it does a decent job of bringing lots of things folks are talking about onto our radar screens in these short pieces. -DR

See Also