COVID-19: An accelerant for differentiation and institutional consolidation
For most industries the COVID-19 global pandemic will have a profound differentiating impact, accelerating and stimulating some (e.g. online retail and streaming media), while depressing others (restaurants and cinemas). So it will be with the higher education industry.
What impacts higher ed will impact our economic recovery. Not only does the industry account for 2.5% of GDP, but it is a critical determinant of individual recovery. Looking to the Great Recession of 2008-09, over 95% of the jobs created post-crisis went to workers with at least some college education and those with a college degree rebounded from the recession sooner.
It is imperative that higher ed policymakers and leaders recognize that the crisis is accelerating two disruptive tendencies already present in the industry: accelerated differentiation and institutional consolidation. Accelerated differentiation, as some schools attempt to pursue new markets, restructure business models, monetize assets, share administrative services or accelerate digital learning environments, and others attempt to retrench. And a wave of institutional consolidation, as schools also explore merger and acquisition opportunities. Further, the vulnerability of higher education rests on five features of the industry: it is highly heterogenous and fragmented, generally financially fragile, ranking sensitive and exhibiting excess capacity.
There are a wide variety of types of schools, ranging from two-year schools to four-year masters or doctoral institutions and research universities, faith-based colleges and a myriad of specialty schools in between. Institutions are heterogenous not only in scope but also in size, with 8% of enrolling more than 15,000 students and 40% less than 1000. The sector is also highly fragmented, with over 4,300 schools across the U.S., some part of larger systems, but most stand-alone. With rare exceptions, even within systems, colleges and universities act as individual siloes, each in effect trying out its own best guess on how to cope.
Many colleges, and some universities, were already financially fragile before the pandemic struck. In a 2017 study we observed that small schools had the highest risk of closure: 70% of 4-year, private nonprofit and public institutions with enrollments under 1,000 exhibited at least three risk factors for closure, compared to just 9% of institutions with more than 10,000 students. So, even if they wanted to, many institutions, especially small ones, may not have the resources necessary to cope with the pandemic.
The introduction of readily accessible, highly publicized rankings over the past three decades, whether reflecting true quality or not, coupled with aggressive institutional branding, have accelerated the recognition of the top 200 schools in the U.S.—to the detriment of the other 4,000 or so schools. Overall, the ability of ‘the less ranked and celebrated 4,000’ to meet enrollment and revenue demands post-pandemic will be very different than that of ‘the ranked and recognized 200’.
Finally, it is important to understand that the U.S. higher education industry, as a whole, has significant excess capacity. Most obviously, that excess capacity is reflected in the steady decline in average enrollment numbers for most, but a few, of the schools. This excess capacity will further exacerbate the financial stress associated with the pandemic, as private and public monies dry up or are diverted and overheads remain high. In part, this excess capacity will be addressed through significant market consolidation.
As an example, if the top ten largest four-year campuses chose to increase their enrollment by 10%, this would absorb the student populations of more than 120 of the smallest schools.
While there have been an increasing number of mergers of colleges and universities nationally, the rate so far represents just a fraction of what the market and the excess capacity in the industry would demand. Most mergers to date have been between individual institutions, although the greatest potential for school mergers—and improved educational efficiencies—rests with larger public university systems, many of which include 20 to 60 institutions and campuses. To date, while there are a few examples of systematic mergers in the two-year (junior and technical) college system nationally, there is only one significant example of strategic mergers in a four-year college system—that carried out by the University System of Georgia between 2012 and 2018.
As for any crisis, there will be many opportunities not only to restructure for survival, but to restructure for growth and expansion. Each institution’s path will be conditioned by its own circumstances and leadership, but the net result will be an industry seeking to realign itself to the changing condition of the marketplace, changes that are being accelerated by the current pandemic.
To be able to navigate the crisis successfully, schools, governmental regulators and policymakers will have to face the reality of the current and, even more important, the post-COVID-19 higher education environment. Institutions that wait too long to act may find themselves with too little capital, too much debt, too compromised a brand image and too soft an enrollment—unable to differentiate or find a willing merger partner and with their only option being closure. While higher education has stood the test of a thousand years, many individual schools will simply not survive the next five.
Ricardo Azziz is a research professor of Health Policy, Management and Behavior, at the University at Albany, SUNY, and former founding president of Georgia Regents University (now Augusta University). He co-authored the recently published book Strategic Mergers in Higher Education (Johns Hopkins University Press), along with Guilbert Hentschke, dean emeritus of the Rossier School of Education, University of Southern California; Bonita Jacobs, founding president at the University of North Georgia; and Lloyd Jacobs, president emeritus of the University of Toledo.