Are For-Profit Universities Economically Sustainable?

The following article appeared in last Sunday's New York Times, and encapsulates many of the concerns I and I think others have had about Ashford University. Troubles Grow for a University Built on Profits:

PHOENIX — The University of Phoenix became the nation’s largest private university by delivering high profits to investors and a solid, albeit low-overhead, education to midcareer workers seeking college degrees.

But its reputation is fraying as prominent educators, students and some of its own former administrators say the relentless pressure for higher profits, at a university that gets more federal student financial aid than any other, has eroded academic quality.

According to federal statistics and government audits, the university relies more on part-time instructors than all but a few other postsecondary institutions, and its accelerated academic schedule races students through course work in about half the time of traditional universities. The university says that its graduation rate, using the federal standard, is 16 percent, which is among the nation’s lowest, according to Department of Education data. But the university has dozens of campuses, and at many, the rate is even lower.

...

Many students accuse recruiters of misleading them, and the university’s legal troubles trace back to similar accusations of recruitment abuses. In 2003, two enrollment counselors in California filed a whistle-blower lawsuit in federal court accusing the university of paying them based on how many students they enrolled, a violation of a federal rule.

After the lawsuit was filed, the Department of Education sent inspectors to California and Arizona campuses. The department’s report, which became public in 2004, concluded that the university had provided incentives to recruit unqualified students and “systematically operates in a duplicitous manner.”

The university paid $9.8 million to settle the matter, while admitting no wrongdoing. But the department’s searing portrait of academic abuse aroused skepticism among many educators.

Those questions are likely to dog the university as it defends itself in the lawsuit, which a district court had dismissed but an appellate court reinstated in September. The university could be forced to repay hundreds of millions of dollars if it loses. It asked the Supreme Court last month to review the appellate ruling, arguing that an adverse outcome in the lawsuit could expose it to “potentially bankrupting liability.”

It is the function of a corporation to enhance shareholder value. Period. Delivering a good or service are merely the modus for generating the profits that feed the shareholders. A corporation that is well run may well have internalized the importance of delivering a high-quality product or service to achieve those profits. But shareholders may not always be satisfied with the level of growth in profits that diligent attention to quality may imply. This raises a larger question in economics and investing: it is appropriate to have near permanent expectations of growth for most or even many firms?

Let's examine the model of the for-profit education institution. It is probably true that during such a company's early, start-up days growth in revenues and profits may be rather spectacular as the company grows to a given size. At some point management may feel an optimal size has been reached. Such an optimal size is a fuzzy benchmark but surely includes such criteria as an ability to effectively hire and manage faculty and maintain a certain educational standard and graduation rate. It must be able to do this in order to ensure a product of reasonable quality such that customers will continue to patronize the establishment.

At that time, what the company really gets into is what is (one hopes) a long period of very slow or stable growth that produces regular, predicable profits. Nothing spectacular, just good old-fashioned blue chip margins. There are a large number of investors for whom high growth (and coincidentally, higher risk) investments are not appropriate; who put more value on an good, old-fashioned annuity investment. Such companies should be more attractive than they are.

But investors collectively have shunned such blue chip companies in recent years. Such a company will be punished by the Wall Street collective which is dominated by institutional investors and mutual funds who value growth stocks most highly. Furthermore, the business plan of the managers and venture capitalists may call for a medium term profit trajectory that rules out such staid business models.

Thus the drive for continuing growth in company size and profits will eventually see an educational institution grow to the point where the size dictates that quality will be reduced. This in turn leads to increased customer dissatisfaction -- higher drop-out and lower graduation rates, increased difficulty in achieving or maintaining accreditation -- which will put pressure on recruiters to continue to feed the maw of the massive education machine, a la the lawsuit now facing the University of Phoenix.

Most of the executives of Bridgepoint Education, Inc, the parent of Ashford University, come to their company by way of the University of Phoenix. In my dealings with some of those officials I am convinced that most of them are aware of the flaws of the University of Phoenix and started Bridgepoint to deliver a better quality education product.

A lot of Clinton's future is pledged to Bridgepoint's ability to deliver a quality education product over a long period of time. I think many of the readers will have their own anecdotes with regard to how well Ashford is doing in avoiding the pitfalls of University of Phoenix -- not just at the business model level -- but also in the areas of faculty, class, and workplace quality.

I think that the management of Bridgepoint will serve themselves, their employees, their customers, and (I hope not lastly as far as they are concerned) the City of Clinton by concentrating on a business model that embraces a high-quality, slow growth, long-term moderate profitability approach. The traditional VP trajectory; spectacular growth, IPO, additional growth to the breaking point will inevitably lead to a poor result for the whichever stockholders end up holding the bag (certainly not the management) and most importantly as far as I'm concerned for the City of Clinton.