Published on 2014/10/17

Economies of Scale and Higher Ed: What Postsecondary Leaders Can Learn from Industry

AUDIO | Economies of Scale and Higher Ed: What Postsecondary Leaders Can Learn from Industry
By taking advantage of economies of scale and putting effort into learning more about their customers, higher education institutions could improve their efficiency and minimize costs.

The following interview is with Jeffrey Camm, department head and professor of operations, business analytics and information systems at the University of Cincinnati’s Lindner College of Business. The higher education industry is undergoing a period of significant change, as institutions are being expected to improve their service of students with fewer resources at their disposal. The only answer to that riddle is to become more efficient. In this interview, Camm discusses the issue and explains how efficiency challenges have been handled in other industries.

1. What are some of the most significant areas of inefficiency higher education leaders struggle with in institutional management?

There’s a lot of pressure on presidents and boards of trustees to control costs, and not surprisingly so, because the cost of higher education if you look at the last 10, 15 years, has far exceeded inflation. There’s extreme pressure to bring the cost of higher education down. A lot of the focus on efficiency is cost driven and, if you think about how universities work, especially state universities, you know they try to be all things to all people. They each offer the whole spectrum of degrees and majors, both graduate and undergraduate. There’s a lot of overlap. One of the toughest challenges is, from a cost point of view, for presidents to think about what is going to be our main thrust. It’s very difficult to not be all things to all people in higher education, whereas in industry, it’s very easy. Industry picks its area and runs with it; it optimizes the product line it offers to consumers.

Some other areas might be simple things like, how are you purchasing what you need to run your institution? Are you smart about how you’re purchasing and looking for quantity discounts? Are you efficiently using energy in terms of smart classrooms and that sort of thing, and then there are also other things like the cost of instructional materials, the cost of textbooks — those are skyrocketing.

2. How can higher education leaders benefit from supply chain optimization, a tactic other industries have used to reduce costs?

A big thing in supply chain efficiency is really around collaboration. If a company has suppliers, they buy from those suppliers, then they transfer that material into a product and they push the product typically out to a distribution network and then it’s pushed out to the retail level. There are a lot of efficiencies that can be gained just by understanding the supplier and understanding the customer.

[To be efficient], you would segment slow-moving goods from fast-moving goods. Fast-moving goods are things there’s a lot of demand for. In higher education, that might be a degree in business. A slow mover might be a degree in something like philosophy or history, which on most campuses has a relatively small number of majors. Tying it back to consumer goods, the company will typically not have slow-moving items in every one of its distribution centers because it’s a slow-moving item so you’ll centralize it so that when demand does occur for it, you know it’s just held in one spot and you know how to get it out there.

How does that translate to higher education? Take the state system of Ohio or any big, well-populated state. Should you have — in a state system— philosophy and history as one of your main products at every campus? Every campus probably needs philosophy and history, but do you need a major at every one of those campuses? There’s inefficiencies if you have a major that’s relatively small and you have to offer all the major courses, so maybe only one state school in the state system has a major in philosophy and another has a major in history and then if a student within the state wants that major, they go to that particular university rather than duplicate all those courses for a relatively small number of majors at each location.

Another good example from supply chain is contracts and purchasing. You’ll see collaboration going on between companies. If they’re purchasing the same thing, they’ll purchase a higher volume and get a lower cost and share savings. In a similar way, higher learning institutions can essentially band together and try to get efficiencies in terms of the purchasing of goods, and you’re starting to see some of that in state institutions in particular.

3. On a larger level, what could higher ed leaders learn from other industrial leaders when it comes to the more effective use of analytics and data?

We did a study here at the University of Cincinnati to look at [whether] differential tuition made sense. We have here some colleges that are world famous. We have a conservatory of music that’s very well known and a college of design, architecture and planning that’s always ranked in the top five nationally. Our president at the time wanted to know if we could charge differential tuition by college, so for high-demand colleges, could we charge a higher tuition for those than some of the colleges that were in lesser demand? You can actually use data to get price elasticity. We did a study that essentially found how demand would change by college. The idea [was to mimic] what they would do in industry; you would differentiate your price based on demand as opposed to making price uniform.

Differential pricing is very big now. You’re seeing it in sports and other places. [It’s been] the case in airlines for a long time; what you pay for a ticket on an airline depends on a lot of things [such as] the demand for seats and when you’re flying. Dynamic pricing is one thing.

Another thing in terms of analytics that higher ed could do is around better understanding the customer. You have a lot of alumni and a big thing right now in higher ed that’s actually a revenue generator is this idea of lifelong learning. You might have 20,000 alumni out there who have a warm spot in their heart for your university. Wouldn’t it be great if you could find out the kinds of things they want to learn about after they get their degree and offer online courses? How do you get those alumni, how do you understand what they want — what’s known as the voice of the customer.

This interview has been edited for length.

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Key Takeaways

  • Institutions and systems should take advantage of economies of scale in such areas as purchasing and degree offerings to maximize efficiencies and minimize costs.
  • Institutions need to gain a better understanding of their products and the needs of their students/customers to ensure they’re adequately serving them.

Readers Comments

Alison King 2014/10/17 at 1:03 pm

I’m troubled by Camm’s claim that institutions are being inefficient when they offer the same program as another institution. “Efficiency” shouldn’t be the only consideration of institutions; “access” is equally important. Institutions tend to offer the same programs so that students have choice in where and how they pursue postsecondary education. What concerns me about the recent interest in institutional efficiency is how devoid it is of a human element. When we just look at the bottom line, we risk overlooking vulnerable students.

Steven Harris 2014/10/17 at 2:26 pm

It’s good to see someone finally address the issue of academic efficiency. For too long, we’ve been tiptoeing about in our conversation about institutional efficiency, focusing on areas like food services, parking lots or other operational elements, while ignoring the elephant in the room: academics. There’s only so much you can cut on the operational side before you necessarily have to address the academic.

I disagree with the comment above that it’s an either-or, that either an institution offers every program or it’s exclusionary to hordes of students. There are ways to organize multi-institutional partnerships so that institutions can realize some efficiency in their academic operations while providing students with comparable access to programming. We certainly have the tools (e.g. online education) to achieve this. It’s a conversation worth having.

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