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Editor's Note:  We are most fortunate  to be able to present to USDLA Journal's readership the remarkable and insightful complete first chapter of Dr. Ruch's just published book,  Higher Ed, Inc: The Rise of the For-Profit University (John's Hopkins Press).  His position espoused here comes from decades of close observation of the mechanics, philosophies and struggles for solvency, successful and not so successful, within academia.  Academia is faced with hard economic choices. These choices may not at all be the choices we thought we perceived as we gazed through the slits in our tower wall.

Higher Ed, Inc: The Rise of the For-Profit University

Richard S. Ruch

Chapter 1: Confessions of a For-Profit Dean

I must confess that until a few years ago I thought that all proprietary institutions were the scum of the academic earth. I could not see how the profit motive could properly coexist with an educational mission. While I did not know exactly why I believed this, I was certain in my conviction that non-profit status was noble, just as the profession of education is noble, and that to be for-profit meant to be in it for the money, which was corrupting and ignoble. All the while, I was immune to the irony of the long hours I endured in lunches, dinners, and receptions cultivating potential donors because they had money and my institution needed it. While whole months of my administrative life were spent in meetings about budgets, downsizing, cutting back, and even laying off, I let myself believe that what we were doing was about education and not about money. When my institution created budget forecasts that included provision for excess revenue over expenditures, I did not recognize it as the profit motive. Likewise, I bought into the mythology of the pecking order. I studied and worked in eight different universities that were, for the most part, good ones but not great ones. Except for two semesters at Michigan and one summer at Harvard, I lived in the middle tier of the pecking order. From that vantage point, the proprietary schools were an easy target, serving to locate my institutions in the middle, or perhaps upper middle when compared with the bottom of the barrel.

Having now lived in and studied the view from the other side, I see that I was wrong in my unexamined beliefs about the for-profits, naïve about what it means to be in it for the money, and misinformed about the nature of the profit motive in higher education. With this book I reexamine this sector of American higher education, shattering some of the myths and clarifying the realities of the for-profit sector of the higher-education industry, from its early roots in the evening schools of colonial America to the rapid growth in the 1990s of the large, publicly held, corporate-run universities. What I have learned, and what I hope to substantiate here, is that many of the for-profit providers are actually doing a creditable and even laudable job of addressing educational needs that are in high demand. That is not to say that these organizations are without faults or that there are not some for-profit educational institutions that are substandard in quality and geared more to making profits than to providing education. Just as there is a wide range of quality among traditional, non-profit colleges and universities, there is a range of quality in the for-profit sector. Just as there has been fraud and abuse of public funds in the non-profit sector, there has been fraud and misuse of financial-aid funds in the for-profits. This book focuses on the largest for-profit institutions, which tend to be located at the upper end of the range in institutional quality. If it is true that the American university system is the envy of the world, part of the credit rightly goes to the unrelenting influence of the for-profit sector, which has stood for the application of education in direct response to social and economic needs and the right to turn a profit on a product or service well delivered and which has continued to force change in a system that has stubbornly resisted it.

The Players

The focus of this book is the reemergence of for-profit higher education in the form of large university systems that are owned and operated by publicly traded for-profit corporations. This is not a book about proprietary schools, the small, family-owned businesses run by one or more proprietors who take the profits earned in the business as personal income. Thousands of these schools exist in America and in other countries to meet the demand for training in several trades and regulated industries, such as cosmetology, automotive mechanics, and tourism. Nor is this a book about the hundreds of diploma mills, fake schools that basically sell degrees in any field to customers who cough up $3,000 to $5,000.[1] Neither is this a book about online universities. Although all of the institutions profiled in this book use online instruction to supplement in-class seat time, online education represents a small portion of their business. Finally, this is not a book about what are called "corporate universities," such as Sun Microsystems University, Motorola University, and the University of Toyota. The subject of this book is for-profit colleges and universities that are regionally accredited, degree-granting institutions of higher education that offer programs at the associate, baccalaureate, master's, and doctoral levels. (Five of the major companies in this category are profiled in chapter 2.) Instead of donors they have investors. Instead of endowment they have private investment capital. Instead of being tax-exempt they are tax-paying. As the chapters that follow make clear, these core distinctions set these institutions apart, and that has made all the difference.

Some of the more successful for-profit education providers are relatively new organizations, such as Quest Education, founded in 1988 in Roswell, Georgia, an aggressive acquirer of non-profit colleges (with more than 30 campuses by the year 2000), some of which were facing bankruptcy. Others have been around for many years, such as Strayer University, founded in 1892 in Washington, D.C., and the DeVry Institutes of Technology, founded in 1931 in Chicago. Although the for-profit model in higher education is not new, the creation during the 1990s of publicly traded holding companies that own and run universities is the newest development in a tradition of genteel businesses that existed even before the founding of the first American colleges. Indeed, many of the for-profit providers had humble and quiet births, including the boisterous University of Phoenix, which actually grew out of the humanities department at San Francisco State University in the early 1970s.[2] Similarly, some of today's respectable non-profit colleges and universities actually began as proprietary schools, such as Rider University, which was founded in 1865 in Trenton, New Jersey, as one of the campuses of the Bryant and Stratton chain of business schools, some of which survive to this day.

Institutional Growth and Academic Respectability

The newsworthy story in the for-profit sector during the past decade has been growth and increasing respectability. Since 1990 the number of for-profit, degree-granting college and university campuses in the United States has quietly increased by 112 percent, from approximately 350 to 750 campuses.[3] During the same period at least 200 non-profit colleges closed their doors. The National Center for Higher Education Statistics reported that there were 669 for-profit, degree-granting institutions in the United States in 1996. The Integrated Postsecondary Education Data System indicates that in 1996 about 15 percent of all two- and four-year institutions in the United States were for-profit. It estimated that enrollment in these for-profit colleges and universities was 304,465 in 1996, or 2.1 percent of the total U.S. enrollment of 14,367,530. The number of full-time faculty employed by for-profit, degree-granting institutions in 1996 was estimated to be approximately 26,000, or about 5 percent of the total U.S. full-time faculty of 528,000. For-profit colleges and universities constitute the only sector of the higher-education industry that is growing.* My own prediction, based on a year-long study of the industry, is that the for-profits will continue to grow in number and market share throughout the next decade, whereas growth in the non-profits will continue to decline somewhat.

The increasing respectability of the for-profit institutions and their growing visibility within the higher-education community is evidenced by their meeting and maintaining the standards for accreditation by the regional associations and by other professional accrediting bodies. Argosy Education Group, for example, which offers doctoral programs through the ten-campus system of the American School of Professional Psychology, is regionally accredited by the North Central Association and has also been successful in gaining accreditation at the doctoral level by the American Psychological Association. Similarly, DeVry's campuses hold both regional accreditation and program accreditation in electronics-engineering technology by the Technology Accreditation Commission of the Accreditation Board for Engineering and Technology. The University of Phoenix is accredited by the North Central Association, and its nursing program is accredited at the baccalaureate and master's levels by the National League for Nursing Accreditation Commission.  The for-profits tend to regard accreditation as a business objective, determining what it will take to meet or exceed the thresholds and then simply allocating the financial and human resources required to meet them. Using this straightforward strategy, they have won the approval of, and often impressed, regional accrediting bodies and their campus-visit teams by meeting and sometimes exceeding the published standards for accreditation. In the past, for-profit institutions struggled to meet the accreditation standards, and even when they did, the accrediting bodies were sometimes reluctant to grant accreditation to these institutions because of their "proprietary" status (see chapter 6). In today's outcomes-assessment environment, to deny accreditation to a for-profit college or university when it meets or exceeds the published standards would probably bring charges of restraint of free trade.

The other aspect of the new respectability of the for-profit providers has to do with the perceived shift in public attitudes toward corporate America and the free-market economy in general. During the final decade of the twentieth century the profit motive seems to have lost some of its association with evil intent. The for-profit universities caught the wave of renewed belief in, and fascination with, corporate enterprise and the performance of the stock market in particular. Even small investors who had no money in the stock market other than perhaps an IRA or part of a 401k or a retirement annuity, such as TIAA-CREF, have done very well during the past ten years. At the same time that the profit motive was enjoying a renaissance of sorts, non-profit organizations were facing greater public scrutiny, in part because of scandals over alleged excessive lobbying, fraud, and mismanagement at such institutions as United Way of America, Toys for Tots, the NAACP, and Stanford University.

"These are difficult days for America's non-profits," writes Charles Kolb, general counsel for United Way and former official at the U.S. Department of Education (DOE). Kolb sees the Stanford scandal--which broke in 1991, when the university was accused of excessive indirect cost rates and misuse of federal research dollars--as "the beginning episode that brought the `age of accountability' to American postsecondary education in particular and to the non-profit sector more generally."[4] Stanford was ultimately cleared of any criminal charges involving fraud, but the issue of mismanagement had become a major part of the national higher-education agenda. By the mid-1990s non-profit universities were facing what Kolb describes as the third wave of accountability. Higher education was relatively untouched by the first wave, which hit American corporations in the 1980s, as global competitiveness, stockholder demands, and emerging technologies caused massive layoffs and restructuring. The second wave, directed at big government during the Reagan and Bush administrations, targeted government spending and the national deficit. But again, in Kolb's assessment, this second wave of accountability did not significantly impact higher education. The third wave, however, starting with the Stanford case, led to new demands for accountability, the new emphasis on outcomes assessment in the regional accreditation standards, and the language of value added throughout the higher-education industry. At the heart of the accountability issue, says Kolb, is the question of how to measure the value added of a college education. "The sad fact," he laments, "is we don't yet know the answer."[5]

Yet the for-profit colleges and universities do have an answer. For them, the value added of a college education is what Dennis Keller, chairman of DeVry, calls "career launching." The usual metric for assessing value added is the significantly greater earning power of a college graduate compared with that of a non-college graduate (currently about twice as much). The earning-power argument is a difficult pill to swallow for many traditional educators, for it reduces the sacred ideals of higher education, in particular the artes liberales ideal, to an economic-return equation. However, this loss of ideals--or to put it more gently, this narrowing of ideals--is what has happened in American higher education, where today even elite institutions often use the earning power of graduates to justify the price of tuition.[6]

The issue of measuring the payoff of a college degree by the earning power of graduates is addressed more fully in chapter 6. The point here is that the for-profit providers are abler than most non-profits to deliver a direct response to the demand for value-added measurement. Indeed, their corporate environment already requires such measurement as a routine part of business operations.

The Question of Educational Quality

One of the most enduring myths about for-profit educational institutions is that they generally offer a poor-quality education to students. "Many of our colleagues in the traditional academy still believe we are all snake oil sales people," says Jack Sites, CEO and provost of Argosy Education's American Schools of Professional Psychology and a former official with the Southern Association of Colleges and Schools. He adds: "They continue to hang on to the self-serving myth that we are selling products of sub-par quality for too much money to students who could not get in anywhere else."[7]

In a somewhat kinder judgment, it is often assumed that, at best, what the for-profits provide to students is employability, and not necessarily education.[8] Of course, they do offer employability, and not only is that one of their strengths but it is what a large segment of higher education's consumers expect from a college education. The for-profit providers have aligned themselves with the public's expectation that a good college education should result in employability. Employability, however, is not all they provide, for real teaching and learning also occur in these institutions. In my experience, when good teachers work with motivated students, real learning often results. All of the for-profit providers profiled in this book have both numerous good teachers and a large proportion of highly motivated students.

Some educators who assume that for-profit schools offer a poor-quality education have asserted that the for-profit providers are subject to less regulation and oversight than are the non-profit institutions.[9] In fact, as publicly held companies, they have oversight and regulatory requirements that go beyond those faced by non-profit institutions, such as quarterly reports to the Securities and Exchange Commission. Others suggest, incorrectly, that for-profit providers are notorious for allegations of fraud and conspiracy. My own review of the literature suggests that there are at least as many actual instances of fraud and mismanagement in the non-profit sector, perhaps more. And Jack Sites observes, "If the journalistic community in America did not hold traditional universities in such high regard, they would find an incredible story in the revelation that higher education is absolutely rife with corruption, fraud, and mismanagement."[10] There is also a lingering belief, deep within the consciousness of the traditional academy, that profits and the market generally are fundamentally antithetical to serving the needs of society and of students.

It is not clear, at least to me, when or how it became a virtue for a university to be organized on a non-profit basis instead of a for-profit one. We know that our earliest universities were strongly and directly tied to the churches in terms of both finances and mission. Perhaps the virtuousness of non-profit status for the university grew out of this early association with churches. Regardless, my own sense is that for-profit or non-profit status is not in and of itself a determinant of institutional quality. A similar point was recently made in a study of the health-care industry, which is undergoing a transformation in teaching hospitals from non-profit to for-profit status.[11] Initially, some medical-school officials found this trend alarming and were concerned that the for-profit companies would cut back and eliminate unprofitable services that were nonetheless important to the hospital's mission. Conducted by two researchers at the Harvard Medical School, the study examined the impact on the teaching mission of hospitals that were sold to for-profit corporations. No negative impacts were found on teaching, medical education, research, or indigent care. In effect, the changeover to for-profit status did not impact the quality of education or the social good one way or the other.

It must also be said that the academy and society in general have for centuries debated the question of what constitutes a proper, quality education. The debate that began in ancient Greek and Roman philosophy about whether the focus of education should be on training the intellect or cultivating noble virtues has not been resolved.[12] No clear, uniform understanding has emerged about what constitutes a proper university education. Instead, there are several different models and philosophies of higher education, just as there is considerable mission diversity among universities. The for-profit institutions are simply part of higher education's philosophical diversity and multiple missions.

The popular assertion that the American system of higher education is the envy of the world, a claim that is routinely heard at the plenary sessions of academic conventions ranging from the Modern Language Association to the American Assembly of Collegiate Schools of Business, is sometimes delivered as a kind of reminder that things could be worse. The basis for the claim that the American system is the best in the world is not always apparent, but clearly the United States spends more on education than any other nation--about $750 billion, more than twice as much as on defense, with about $340 billion going to higher education--and American universities continue to attract large numbers of foreign students, especially at the graduate level.

Still, many higher-education insiders continue to sound eschatological alarms, ranging from such thoughtful books as Jaroslav Pelikan's Idea of the University, Bill Readings's University in Ruins, and Bruce Wilshire's Moral Collapse of the University to books about corruption within the academy and some that point to the "corporatization" of the university as the root problem, such as Nelson and Watt's witty and self-conscious Academic Keywords.[13] These books raise many issues about the present state of higher education in America and its future. None of them and few presenters of plenary speeches at academic conventions are warm to the idea of applying the corporate model to higher education. Some are quick to cite the emergence and growth of such for-profit providers as the University of Phoenix, which is seen as an extreme application of the corporate model where it probably does not belong, as a clear sign of end times. Given the concern about the rapid growth of the for-profit purveyors and the constant claims that higher education is in crisis, collapsing, and headed for ruin, it is not clear just what the rest of the world is envying.

The overlooked and somewhat hidden aspect of the unfolding story of higher education in America is the for-profit sector, which has been present as a mostly silent but nonetheless influential partner in the founding, development, and evolution of the American system of higher education right from the beginning. The rich and deep history of proprietary education in America (see chapter 3) attests to the fact that these institutions developed and matured alongside of, and not apart from, traditional colleges and universities. A true understanding of both the tradition and the future of higher education in this country must account for them.

For-Profit and Non-Profit Distinctions

What is clear is that for-profit and non-profit universities tend to operate under different hierarchies of institutional and organizational values. These different hierarchies of values are revealed in a number of distinctions that can be made between non-profit and for-profit institutions. Table 1.1 shows ten such distinctions that, taken individually, provide a breakdown of salient points of difference and, taken collectively, provide an overall picture of how these types of institutions differ. Each set of distinctions is briefly described below and discussed further in subsequent chapters.

Tax-exempt/Tax-paying

One of the obvious areas of difference is taxation. Milton Friedman, the Nobel laureate economist, has suggested that the terms for-profit and non-profit should be dropped altogether from the higher-education lexicon in favor of the more descriptive tax paying and tax-exempt.[14] Indeed, the essential financing distinction between non-profit and for-profit universities is not a matter of profitability or the profit motive but one of taxation, as both a source of revenue and a form of expenditure (see chapter 4). In essence, non-profit institutions are, by definition, exempt from paying taxes. In fact, non-profit colleges and universities, including all public and most private institutions, receive tax subsidies to support their operations. Public colleges and universities receive an average of 50 percent of their revenues in the form of tax subsidies from federal, state, and local governments, while private non-profit colleges and universities receive about 17 percent.[15] The for-profits, of course, receive no tax subsidies. Instead, they have a substantial tax burden, with most education companies setting aside about 40 percent of earnings before taxes for paying taxes. These differences in the tax status of the institutions represent fundamental differences in the way they are organized as corporate entities. For example, the non-profits are oriented toward maximizing the tax subsidies they receive, whereas the for-profits are oriented toward minimizing the tax they must pay on profits.

Donors / Investors

Non-profit institutions have donors, and the corollary on the for-profit side is investors. Donated income is a key source of operating revenue and financial security for non-profit institutions, and the same is true for the for-profit institutions, for which "donations" come in the form of stock purchases. Non-profits spend considerable energy on the cultivation of potential donors, while for-profits cultivate the investment community. In some respects this cultivation work is similar, particularly because it involves promoting the institution to audiences that have financial resources to donate or invest.

Yet there are differences as well. For one, the cultivation of donors on the non-profit side often involves many members of the institution. Not only the chief development officer and the president but also academic deans, members of the faculty, and even students perform fund-raising work. On the for-profit side, only senior management, supported by one or two professional staff members, cultivates investors. As an academic dean at DeVry, I have never been involved in fund-raising of any kind, but as an academic dean in non-profit universities I spent as much as a third of my time on fund-raising. A second difference is that while both donors and investors have an interest in how their financial support is used, investors also expect a financial return. Investors bring an added dimension of accountability for operating the institution in ways that ensure profitability and future earnings.

Endowment/Private Investment Capital

The third distinction follows from the second. Donated income is accumulated in the form of endowment in the non-profits, while stock purchases in the for-profits take the form of private investment capital. Endowment and private investment capital function similarly in each sector, providing the financial foundation for long-term solvency and investment income that can also be used to support current operations. Non-profit universities, like other individual and corporate investors, invest all or part of their endowment funds in the stock and bond markets. When these investments earn dividends, the non-profit sector returns a portion to the endowment. When the for-profits earn dividends on their private investment capital, they return a portion to the stockholder. Both endowment and private investment capital, then, are invested for the purpose of realizing growth, and a portion of that growth is returned to either the donated fund or the investor.

Attracting money, whether in the form of donors or investors, requires the ability to inspire confidence. When a traditional university is able to build a substantial endowment fund, it not only ensures the institution's future but also economically affirms the institution's reason for being. When alumni, corporations, private foundations, state governments, and wealthy individuals donate money to a university, the institution is affirmed in powerful and tangible ways. In essence donors are saying, "We believe in you." The same is true in the for-profit sector when investors "donate" their money to an educational company through the purchase of its stock. When private citizens and corporate investors buy ownership in a university through stock purchases, the institution's financial future is secured and its reason for being is affirmed. Both the for-profits and the non-profits depend on other people's money for their solvency and long-term survival. The for-profit model is stockholder-driven, while the non-profit model is stakeholder-driven.

Stakeholders/Stockholders

The stockholder-driven model appears on the surface to be vastly simpler than the stakeholder-driven model. Stockholders all want the same thing, namely, a return on their investment. To ensure a steady influx of private investment capital, the for-profits must demonstrate an ability to generate a return to stockholders in the form of equity. The simple barometer of how well a publicly traded company performs is, of course, the changing value of its stock. When the stock price goes up, investors make money, and when the stock price goes down, they lose money. The actual gain or loss does not occur, of course, unless the stock is actually sold off. However, the factors that can influence changes in the value of stock are often complex and are influenced by variables outside the control of the company, such as global economic trends and demographic shifts. Of necessity, this adds a certain amount of unpredictability to the company's performance, which in turn adds risk to stockholders. Even when the financial indicators look good, investors will sometimes bail out. Investors buy stock when they feel confident, and consumer confidence is a complex equation.

One of the interesting features of the stockholder-driven model in higher education is employee ownership. Faculty members, for example, along with the deans, presidents, and even the registrars and admissions representatives, often own stock in for-profit universities. This stock may be accumulated through an employee stock-purchase program or a 401k retirement program, or it may be awarded in the form of stock options. DeVry recently gave all full-time employees stock-option awards based on years of service. Aside from being a nice gesture, it was an astute business decision. When faculty members, for example, also become investors in their university through stock ownership, they soon develop a personal stake not only in academic matters but also in the financial success of the enterprise. When the company that owns the university is profitable, everyone who owns stock shares in the profits.

In contrast, stakeholders--students and their families, faculty members, administrators, trustees, alumni, donors, employers, accreditation bodies, community leaders, government agencies--have varied and sometimes incompatible interests and concerns. Trustees, for example, may argue for a reduction in faculty release time from teaching, while certain program-accrediting bodies encourage more release time for research and scholarly activity. Many college and university presidents, along with many other administrators, spend much of their time responding to these stakeholders. Although for-profit institutions must deal with many of these same stakeholders as well, their first priority is to the stockholders. Built into the stakeholder-driven model, of course, is the idea that many persons should have their say, which requires an enormous amount of time and patience and often stagnates the decision-making process. This emphasis on participation and inclusion of everyone who has a stake in the institution brings up the fifth distinction: shared governance versus traditional management.

Shared Governance/Traditional Management

The concept of shared governance is deeply ingrained in the culture of the non-profit university. In the British, French, and German universities, for example, the faculty senates are said to wield considerably more power than the rectors.[16] By comparison, American university presidents and provosts appear to have more formal power, although they often feel powerless. "Shared governance is an enlightened concept," says Scott S. Cowen, president of Tulane University, "but in execution it may actually be a deterrent to the future of higher education."[17] Cowen is outspoken about the "new competitive scenario unlike anything we've seen before" in traditional higher education, resulting in part from the rise and success of the new for-profit providers. Consequently, he wants his institution and others to be able to make at least some major decisions quickly and effectively. Standing in the way of quick, effective decision making is the tradition of shared governance. "The real zealots of shared governance lecture that shared governance is an end in itself," he says. "It is not."[18]

Yet shared governance is deeply woven into the fabric of the university, even on the for-profit side, although these corporations have an advantage: the for-profits can and do reappropriate the concept of shared governance, applying it to certain areas and excluding it from others. In my experience, the management strategy of the for-profits is to allow enough shared governance to appease regional accreditation visiting teams and keep the faculty from unionizing. In so doing, the for-profits retain management control of the decision-making process while still making some provision for shared governance. For example, faculty in the for-profits do not have tenure, which changes the balance of power between the faculty member (employee) and the institution (employer). Yet the faculty in the for-profits do enjoy a reasonable measure of academic freedom, and they participate fully in decisions regarding the curriculum. In other areas, however, such as admission requirements, the for-profit faculty do not have much of a voice. (The issues of tenure, academic freedom, and organizational culture in the for-profit institutions are addressed in chapter 5.)

The governance structures and processes of the for-profit university are based on the values of traditional corporate management. Accountability for certain outcomes is fixed with individual managers, who have both the responsibility and the authority to make decisions. In these environments, governance is not "shared" in the way the traditional academy has operationalized the term. The reason for this can be summarized in one word--bosses.

One of the realities of working in for-profit universities is the presence of bosses, and this is especially true of the multicampus organizations controlled by a home office. Everyone on these campuses has at least one boss, often two or three, and there is no mistaking who they are: they conduct and sign your annual performance appraisal, which directly affects your compensation and promotability. In contrast, the collegial model of traditional universities intentionally blurs the distinction between bosses and colleagues. The dean wants to be your colleague, as does the provost and even the president, and while they are also bosses in the technical sense, they are encouraged to embrace this role apologetically. In the for-profits your boss is clearly not your colleague but your superior, and you are his or her employee, subordinate in rank, authority, responsibility, and power. Any modicum of shared governance is inevitably split unequally, and the boss must sanction any pretense of genuine collegiality. In many American corporations today there are some enlightened and progressive leaders and managers, but the for-profit higher-education companies are all managed conservatively according to tried-and-true methods of supervision. (The management culture of the for-profits, with its emphasis on the supervision of work, along with an explanation for why this conservative approach has so far worked fairly successfully, is discussed more fully in chapter 5.)

Prestige Motive/Profit Motive

A sixth distinction describes an underlying motive that drives the institution toward the achievement of its goals and mission. The non-profits are driven by what I call the prestige motive, as opposed to the profit motive on the for-profit side. The prestige motive is the desire to move up in the pecking order of perceived ranking among competing institutions. All colleges and universities have a group of other institutions to which they like to compare themselves, whether it's the Ivy League, the second tier, the best buys, or a group of neighboring competitors. Despite questions about the methodologies used in the college rankings published in such popular magazines as Money and U.S. News & World Reports, these rankings are taken seriously by most institutions listed in them, and those excluded want to get on the lists. As some institutions grow and mature, they often seem to fall into a kind of Harvard-in-the-small mentality, seeking to add more signs of prestige, such as endowed chairs, and even changing their institutional names to reflect greater respectability. Many state colleges have fought to be called universities, and some have also dropped the word state from their names, such as Memphis State University, which used to be called Memphis State College and is now called the University of Memphis. The drive for greater prestige sometimes compels institutions to take actions that anger alumni and alienate the local community, such as Trenton State College's decision to change its name to the College of New Jersey, a decision that still irks the city fathers in Trenton as well as the old guard at Princeton University (which was originally founded as the College of New Jersey).

The for-profits, on the other hand, are not particularly interested in prestige; they are driven by the profit motive. (I argue in chapter 4 that the profit motive is actually alive in non-profit colleges and universities, albeit not with the same visibility and force as in the for-profits.) Profitability is imperative in an enterprise structured on the stockholder model, and at the for-profit universities the profit motive translates into a kind of bottom-line discipline that impacts the whole organization. In such an environment, the academic side of the house becomes a tightly managed service operation, for the for-profit providers regard the classroom as the place where revenue is generated and costs are the highest.

In the simplest of terms, the for-profit universities have taken a highly traditional model of education--a teacher in front of a class of students--and run it like a business. Scale economies and operating efficiencies are deployed to the fullest extent, with the result that the familiar inefficiencies of the traditional college in such areas as space utilization, class size, and efficient deployment of faculty, are minimized. (The "luxury of inefficiency" in traditional higher education is discussed in chapter 6.)

The faculty, which in all educational institutions represents the single largest recurring financial expenditure, are fully deployed to teach in the for-profit institutions. At traditional universities, faculty are typically released from a third to a half of their teaching time for other responsibilities, primarily research, administration or governance, and service activities. Such release time may be a necessary investment in a research university, but in the applications-oriented for-profit environment it is considered a nonproductive expense that cannot be leveraged into profitability. The heavier teaching loads (usually four to five classes a week) and almost total lack of release time for research and minimal release time for governance represent significant cost savings in the for-profit institutions.  Yet it is not merely efficiencies and scale economies that result in profitability. My years in the for-profit educational sector have taught me that the two factors above all others that drive profitability are educational quality and customer service. No for-profit college or university can survive without providing both a reasonably high-quality educational experience and a high level of customer service. If someone imagines that these institutions make profits merely because they offer a substandard education on a massive scale, they are largely mistaken. Student consumers, especially the more mature students typical of the for-profit providers, are knowledgeable and demanding customers who are not easily satisfied. They demand a substantive and rigorous educational experience for their tuition dollars, along with a high level of convenience and customer service. And if they do not find it, they will go elsewhere.

Why and how the for-profits are profitable while many traditional non-profit institutions struggle to break even is discussed in detail in chapter 4, where the downsides of the profit motive--greed and the emphasis on sales--are also considered. The point here is that the for-profits replace the prestige motive with the profit motive.

Cultivation of Knowledge/Application of Learning

In fundamental ways the major universities are now focused on the generation of knowledge and the advancement of the disciplines through basic and applied research, experimentation, and discovery. The value of such work permeates the whole of such institutions, and some would say it is at the very heart of the idea of the university. Liberal arts colleges represent another valued tradition related to the cultivation of knowledge, in this case for more intrinsic and less extrinsic ends, through the training of the intellect and the development of moral habits and virtues.[19] The generation, dissemination, and advancement of knowledge are core values that are protected by academic freedom and more or less woven into the mission statement of virtually every respectable, traditional academic institution. Even the for-profit providers do not totally ignore these values, for they are more or less built into accreditation and state licensing standards. While DeVry, for example, offers no degrees in the liberal arts, 50 percent of the coursework in the baccalaureate programs at the New Jersey campus is in the liberal arts and sciences, as required by the state of New Jersey. All of higher education is deeply influenced by the values associated with what I call here the cultivation of knowledge. Indeed, a recent study of faculty-incentive systems published by the National Center for Postsecondary Education Improvement concluded that "the research model has come to pervade all types of institutions of higher education."[20]

Yet there is another view of what it means to be in the knowledge business. This view acknowledges the value of generating new knowledge but also recognizes another important priority, the application of knowledge that already exists to solve practical problems. As I illustrate in chapter 3, this focus on the application of knowledge, along with the development of skills, to solve problems has been the primary focus of the for-profit sector of higher education since its beginnings in colonial America. This focus requires being closely attuned to the current needs of the marketplace, especially in areas where there is a strong, unmet demand for specialized education and training.

Discipline-driven/Market-driven

Market responsiveness is the key to the success of the for-profit players. The phenomenal growth of the University of Phoenix during the last ten years, for example, is essentially the result of timing and successful market positioning. Phoenix jumped out ahead of all competitors by being at the right place at the right time with the right products and services. As the adult population grew to represent 50 percent of all college students, Phoenix was there with what many of them were looking for, described by Jorge de Alva, Phoenix's president, as the demand for "a professional, businesslike relationship with their campus that is characterized by convenience, cost- and time-effective services and education, predictable and consistent quality, seriousness of purpose, and high customer service geared to their needs, not those of faculty members, administrators, or staff." 21 Such a description holds true for DeVry, Strayer, Education Management, and Argosy, each of which has identified a unique market niche within the vast marketplace of U.S. higher education's 15 million students.

Market responsiveness requires that an institution adapt to rapid, discontinuous change. Curricula must be updated quickly and continuously, new programs must be developed and launched while the market need is extant, and existing courses and programs that no longer meet current demand must be dropped. Many traditional, non-profit colleges and universities are unresponsive or slow to respond in these ways because they are discipline-driven, not market-driven. While the for-profits listen to the marketplace, the non-profits listen mainly to the disciplines.

Academic disciplines are controlled by the faculty and tend to change slowly, deliberately, and incrementally. The traditional model places a high value on allowing the disciplines and their professors to play the lead role in guiding change in academic programs; as a result, the change process in many of these institutions is evolutionary. Tenured faculty must be deployed even if there is low demand for their disciplines. In addition to the traditional emphasis on inclusiveness, collaboration, and consensus, the discipline-driven institution is less concerned with the marketplace and less able to respond to it quickly.

Quality of Outcomes/Quality of Inputs

In allocating resources and assessing educational quality the for-profits tend to place greater emphasis on educational outputs--student satisfaction, retention rates, completion rates, and placement rates--while the non-profits have traditionally placed a higher value on inputs--admissions selectivity, faculty credentials, and an array of extracurricular programs and activities. Student placement, for example, is carefully measured in the for-profit environment, where it is generally supported by a relatively large investment in human, physical, and financial resources. At my own DeVry campus, for example, with an enrollment of 3,500 students, the placement office is staffed by 13 full-time employees, 10 of whom are professional placement advisers. This represents a much larger placement operation than found at most non-profit institutions. As a consequence, the placement rate at DeVry has hovered around 95 percent for more than 10 years running, a rate considerably higher than at most traditional undergraduate colleges and universities. Clearly, student placement is a high core value at DeVry, and a key outcomes metric in assessing institutional quality.

In contrast, a number of traditional non-profit institutions do not measure and report student-placement rates. Instead, they tend to place a higher value on such input measures as student selectivity and entering SAT and ACT scores, which are carefully measured and reported as an indication of institutional quality and ranking in the pecking order.

Faculty Power/Customer Power

The 10th and final distinction concerns the locus of power within the institution. In most, perhaps all, of the non-profits the faculty are the focus of power within the governance structure. Longstanding tradition, the dominance of the disciplines, the tenure system, the principle of academic freedom, shared governance, and the presence of collective bargaining on many campuses have all contributed to strengthening and protecting the power of the faculty. In the for-profit environment the role of the faculty is more limited, and they generally do not have as much institutional power. The strong customer orientation on the campuses of Phoenix, DeVry, Education Management, Argosy, and Strayer shifts the center of gravity. At these institutions, the students and the managers (or bosses) are the focus of power. (This shift and its implications on the life of the institution is analyzed further in chapter 5.)

Crossing Over to the For-Profit Side

Those of us who have left traditional universities and crossed over to for-profit institutions feel a certain kinship. What many of us have discovered is that the for-profit way of doing education is not so much better or worse than the non-profit way; it is just a different approach. Many who have crossed over find that there is a certain refreshing honesty associated with being openly for-profit, a welcoming lack of pretense in the economic exchange between students and their institutions. Administrators who have worked in both camps (and even some of the faculty) find that not having to deal with the tenure system is a relief.

There have been many times when I truly enjoyed the administrative freedom of actually making decisions and implementing them. It has been satisfying, for example, to see a new degree program for which there is strong market demand go from idea to implementation within twelve months. I have felt effective and responsible to my students in being able to handle a few cases involving faculty members who were, simply put, terrible classroom teachers. One, for example, was a professor who was abusing his female students through inappropriate language, extreme suggestiveness, and outright propositioning. I witnessed this behavior firsthand, as did others on the faculty. It was gratifying for me to be able to get this person out of the classroom immediately. That would have never happened in a traditional academic environment, where the concern for due process would have prevented me from taking immediate action.

And yet, I must confess that for traditional academic types like me there is also a certain sense of loss in moving into the for-profit environment. I was weaned on the ideals of collegiality and shared governance, and I regard these ideals as noble, enlightened, and worth striving for. At DeVry, in my work with the academic deans and the faculty I often have found myself pulled between my natural instincts for collegial decision-making and my company's impatience with the inefficiency that results from inclusiveness and debate. In addition, on some occasions during my years at DeVry I have felt that the faculty were not treated with the kind of respect and professionalism they deserved. For example, my campus often plans faculty colloquia during semester breaks on topics generated by the faculty themselves. Even though 90 percent of the faculty participate in these events, the upper managers have urged me to take attendance, make of list of those who do not attend, and perhaps even dock their paychecks accordingly. I resist this practice because I think it is insulting to the faculty, but I feel an acute sense of loss in the fact that my bosses asked me to do it. I want us instead to honor the principle of attraction, making these colloquia so stimulating and relevant that nearly 100 percent of the faculty will make it a point to be there. If only 90 percent show up (which still seems quite remarkable to me), it simply means we need to do a better job of making these events more attractive.

In my twenty years as an administrator in a private, urban university, a state land-grant university, a liberal arts college, and now a for-profit provider, I have worked during periods of growth and expansion and periods of decline and cutting back. Growth is definitely more satisfying. Building new campuses, hiring new faculty, and generally having plenty of cash to spend on technology, faculty travel, and new program development all make for a stimulating experience. If, like me, you like the idea of working in an institution that is somewhat of a renegade, needing to prove its worthiness to the skeptics but also possessing the financial resources to do so, then the for-profit environment can be an exciting place to be.

Still, there is this sense of loss, call it sadness, a gentle melancholy known in Buddhism as "the death of dreams." In an engaging article in the New Yorker entitled "Drive-Thru U," James Traub writes that "the traditional American university occupies a space that is both bounded and pastoral--a space that speaks of monastic origins and a commitment to unworldliness. "22 For-profits are by design decidedly worldly. Traub puts it this way: "The institution that sees itself as the steward of intellectual culture is becoming increasingly marginal; the others are racing to accommodate the new student."

Those time-honored, laudable ideals--shared governance, the life of the mind, learning for its own sake--sometimes haunt me in my dreams like a secret lover. Something ancient in my heart of hearts resists the notion that efficiency and practicality should define the greatest good. There are real losses in this shift in values, and I suspect that all of us in academia, regardless of our institutional affiliation, have felt them to some degree.

Perhaps that is why I so enjoyed being a member of the mural committee, a group of ten students and faculty who designed and painted a mural over the course of two semesters on a 50-foot wall in the student commons area of my DeVry campus. The painting of the mural was a case study in how individual artistic expression and shared, community vision can work in harmony. We worked collaboratively on our 50-foot wall, sometimes dealing with disagreement but managing somehow to respect one another's individual artistic sensibilities while also adapting our personal styles to create one whole work. There were days when I felt that this was the most important and fulfilling work I did.

EndNotes

Chapter 1  Confessions of a For-Profit Dean

1. J. Bear, "Diploma Mills," University Business, March 2000, 36.
2. The story of the early history of the University of Phoenix was told by President Jorge de Alva at a session entitled "For-Profit and Non-Profit Higher Education" at the annual conference of the Council for Higher Education Accreditation, Washington, D.C., 26 January 2000.
3. All of the numerical data presented here on the for-profit, degree-granting institutions are based on the National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS) reports, available at http://nces.ed.gov/index.html. I relied particularly on the "Fall Enrollment 1996" survey. The estimate of 750 for-profit campuses in 2000 is my own, based on projections from the IPEDS data.
4. Charles E. M. Kolb, "Accountability in Postsecondary Education," in Financing Postsecondary Education: The Federal Role--October, 1995 (U.S. Department of Education, 1995), 1, available at http://www.ed.gov/offices/OPE/PPI/FinPostSecEd/kolb.html.
5. Ibid.
6. A. Krueger and S. Dale, "Estimating the Payoff to Attending a More Selective College: An Application of Selection on Observables and Unobservables," working paper W7289, National Bureau of Economic Research, August 1999. For a general overview of these kinds of studies, see B. Gose, "Measuring the Value of an Ivy Degree," Chronicle of Higher Education, 14 January 2000, A52-53.
7. John E. Sites, interview by author, Chicago, 31 March 2000.
8. See, for example, L. Lee, "Community Colleges and Proprietary Schools," ERIC Digest, September 1996, available at http://www.ed.gov/databases/ERIC.
9. D. Clowes and E. Hawthorne, eds., Community Colleges and Proprietary Schools: Conflict or Convergence? (Jossey-Bass, 1995), 19.
10. Sites, interview.
11. See K. Mangan, "For-profit Chains Don't Undercut Missions of Teaching Hospitals Study Finds," Chronicle of Higher Education, 17 March 2000, A42. The referenced study was conducted by David Blumenthal and Joel Weissman, of Harvard Medical School, and published in Health Affairs, March-April 2000).
12. B. Kimball, Orators and Philosophers: A History of the Idea of Liberal Education, expanded ed. (College Entrance Examination Board, 1995).
13. J. Pelikan, The Idea of the University: A Reexamination (Yale University Press, 1992); B. Readings, The University in Ruins (Harvard University Press, 1996); B. Wilshire, The Moral Collapse of the University (State University of New York Press, 1990); G. Nelson and S. Watt, Academic Keywords: A Devil's Dictionary for Higher Education (Routledge, 1999).
14. Milton Freeman's statements about tax-paying versus tax-avoiding appear in L. Spencer, "The Perils of Socialized Higher Education," Forbes, 27 May 1991, 294.
15. National Center for Education Statistics, Digest of Educational Statistics (1995), available at http://nces.ed.gov/index.html.
16. See M. Green, Transforming Higher Education: Views from Leaders Around the World (American Council on Higher Education, Oryx Press, 1997), 40-41.
17. Scott Cowen, "Leadership, Shared Governance, and the Change Imperative" (presentation at the Eighth American Association of Higher Education [AAHE] Conference on Faculty Roles and Rewards, New Orleans, La., 5 February 2000).
18. Ibid.
19. This view of liberal education is advanced by Mortimer J. Adler in Reforming Education: The Opening of the American Mind (Westview, 1977), 96-116.
20. "Why Is Research the Rule? The Impact of Incentive Systems on Faculty Behavior," The Landscape, Change, March-April 2000, 56.
21. Jorge de Alva, "Remaking the Academy in the Age of Information," Issues in Science and Technology 16 (winter 1999-2000): 54.
22. James Traub, "Drive-Thru U: Higher Education for People Who Mean Business," New Yorker, 20 and 27 October 1977.

About the Author:

Richard Ruch is author of Higher Ed, Inc: The Rise of the For-Profit University (Baltimore: Johns Hopkins University Press, 2001).  He has served as chief academic officer at DeVry College of Technology, and Dean of the College of Business Administration at Rider University.  He holds a Ph.D. in Communication from Rensselaer Polytechnic Institute and did post-doctoral study in higher education at Harvard’s Institute for Education Management.  He is currently studying theology at Princeton Theological Seminary.

More information about Dr. Ruch and the book, Higher Ed, Inc: The Rise of the For-Profit University, may be found on the Johns Hopkins University Press web site: www.press.jhu.edu.  Currently, Dr Ruch may be reached at: richardruch@home.com. After February 28, he may be reached at: richardruch@comcast.net.