Transforming Higher Education
Implications for State Higher Education Finance Policy

by Dewayne Matthews

Higher education in the United States is entangled in a Gordian knot.

Demand is expanding rapidly as both demographic trends and fundamental shifts in the economy produce more prospective students seeking some form of postsecondary education. However, higher education's ability to accommodate this demand is constrained by a lack of resources to fund expansion of the existing base of institutions. It is not that today's colleges and universities are suffering, though--far from it. State appropriations have rebounded smartly from the doldrums of the early- and mid-1990s. Even through the recent years of tight state budgets, many universities were able to maintain budgetary stability by turning to student tuition and fees to make up revenue shortfalls. But the money to pay for expansion of higher education's role in society, and to accommodate all those who would seek postsecondary education, is not there.

Even as state budgets recover, a host of other priorities--from Medicaid and corrections to tax relief and K-12 education--seem to make stronger claims on the attentions of policymakers. The conundrum is that this stasis cannot continue. If one accepts the premise that the world economy is becoming based on knowledge--its acquisition, analysis and application--then what higher education has always professed is actually coming true: that almost everyone everywhere will need and demand advanced levels of education. As more and more people seek advanced education, and as the economy depends on its availability, systems will be developed to deliver it, whether or not through the existing network of public and private higher education institutions. Arguably this is already taking place in the emergence of entirely new forms of postsecondary education.

The only sword that may cut through this knot is the revolution in information technology. Information technology is now driving the world economy and is beginning to drive higher education's response to it. The primary technologies transforming higher education are computing and telecommunications, both of which are expanding in capacity at exponential rates or beyond. States and higher education institutions increasingly look to technology as the way to reconcile the paradox of exploding demand and constrained resources. Up until now, though, the application of technology to higher education has raised more questions than it has answered.

Here it is, two years before the millennium, and the question states and institutions ask most frequently about educational technology is still how to pay for it. While a few crackpot visionaries on campuses and in state houses are saying that technology will transform higher education as we know it, the current reality is that both states and universities are still dealing with technology as an add-on to existing structures, rather than as a new way to do things. Higher education does not consider it relevant that other industries have invested in technology in order to reduce costs by increasing productivity. This reality should not surprise us--the literature on organizational change is full of examples of industries that discover only at the point of extinction their need for transformation or reinvention.

So far, the focus of state and campus consideration of the impact of information technology has been distance education. It is true that information technology is revolutionizing the role of distance education within state systems of higher education and greatly expanding its potential. Distance education has shifted from the fringes of state policy to a prominent role in many states, and the issue of how best to fund distance education is one that states are struggling to address. As important as distance education is, however, it is not the key to understanding the coming transformation of higher education.

Information technology will not simply expand the availability of current programs to off-campus populations, even though the rapid scaling-up of distance education has enormous implications for both higher education institutions and state higher education policy. Information technology is transforming higher education both on and off campus by eliminating the requirement for synchronism in the delivery of course content. The bedrock assumption that education must take place in classrooms in which a professor teaches a group of students underlies the entire organizational framework for higher education--affecting everything from course accounting and faculty workload to tuition and state funding.

But this assumption is no longer valid, mainly because of advances in information technology. Other countries are moving away from the assumption of synchronous learning in their educational planning. As the vice-chancellor of Great Britain's Open University, Sir John Daniel, said in a recent article in Change, "the U.S. system is peculiarly wedded to the technologies of real-time teaching and to the outmoded idea that quality in education is necessarily linked to exclusivity of access and extravagance of resource."

Contrary to popular belief, the outline of the rapidly coming transformation of higher education is fairly clear. Many industries have already been through the process of reinvention and the changes they have experienced have been well documented in numerous books and articles. Many excellent reports on the impact of technology on higher education have been written. Enough is known about the future directions of the relevant technologies to describe the general ways in which higher education will change in the near future. Transformation will not be limited to campuses-state systems of higher education funding, planning and governance will be reinvented as well.

Eventually the delivery of higher education will be reengineered around the available technology. When this happens, productivity (which will be measured in terms of learning outcomes) will be increased and costs (per any unit of measure) will be reduced. Higher education institutions and systems will be very different than they are today. The ivy will grow a little thicker, but what goes on inside and outside the walls of the campus will change in fundamental ways.


How Information Technology
is Transforming Higher Education

So much for the platitudes-what does this mean for higher education? These are the essential realities of the new information technologies for higher education:

Programs can be structured around
asynchronous learning.
It is no longer necessary for educational programs to be built around the assumption that students and teachers will meet face-to-face as a group for learning to take place. Because telecommunications allows people to share virtual space as well as physical space, many of the activities that have traditionally been conducted in classrooms can now occur over telecommunications networks. It is already feasible to distribute the content of most educational programs over networks. E-mail, telephony and videoconferencing allow high levels of interaction between and among teachers and learners, but don't require schedules to be synchronized. This change affects on-campus students as much or more than it does those participating in distance education. Many higher education programs are already primarily asynchronous-doctoral programs for example. But through widespread application of information technology, the advantages of asynchronous learning can be shared by all students.

Distance doesn't matter.
High-bandwidth networks, like those in place on most campuses and many large employers, allow the faithful replication of the classroom experience, for better or worse. Soon, bandwidth growth will permit the widespread delivery of classroom-like experiences to individuals at home, but by that time we will have moved beyond curricular structures based on the classroom into new models that are media-rich and asymmetrically interactive. It is not just instruction that is being transformed by information technology-support services and learning resources like advisors and libraries are increasingly available over networks. As a result, markets for higher education programs will be larger and not defined simply by geography. Likewise, no market for higher education will be secure as a result of its geographic isolation.

Content is a commodity and doesn't add value
to programs.
Because of telecommunications and inexpensive computing power, the content of the college curriculum is rapidly becoming universally available at little or no cost to the user. Course content is just another form of data, and there are a lot more efficient ways to deliver it to people than to have them sit in a room and write it down as someone reads it to them. Since content is simply there, value is added to educational programs by packaging and delivering content to meet the needs of specific groups of individuals. Program structure will no longer be determined by content-based disciplines, but will instead be determined by the characteristics and needs of the target population (market) of students.

Delivery will be customized to the needs
and schedule of the student.
The ability to deliver significant course content over networks opens up numerous options for organizing programs. Because content is becoming a commodity, and networks permit its rapid and flexible dissemination, programs can be custom-designed around the needs and interests of the recipient instead of around the scheduling and resource needs of the provider. Local knowledge--derived from a strong relationship between a higher education institution and its market--becomes a key strategy for adding value to educational programs. Programs, and even degrees, will be organized around flexible course modules which can be combined by students into a variety of forms based on their particular needs. Technology-mediated instruction makes traditional academic calendars and curricular structures at best irrelevant, and at worst a barrier, to effective education.

Most programs will be learner outcome-based.
Several factors are driving the shift toward learner outcome-based education, including the fact that more and more jobs demand specific technical skills, and students and employers expect higher education to ensure that students master them. However, another factor is the increasingly competitive environment for both consumers and providers of higher education. Both the increasing demand for postsecondary education and the feasibility of technology-based delivery are making the higher education market attractive to new private-sector providers. Likewise, existing institutions are now looking to offer programs outside of their traditional geographically-defined service areas. As a result, the consumer of higher education (both individuals and corporate clients) can now choose from multiple providers. In this environment, being able to make some judgment about the quality of competing program offerings becomes critical. Traditional site-based measures of quality, like accreditation, are having a very difficult time coping with new network-based program models. Learning outcomes, as measured by student competencies, is the quality measure that makes the most sense to consumers.

The structure of technology-mediated education
is inherently collaborative.
As direct instruction is replaced by more complex interactive learning systems, the organizational structure of academic program development and delivery will necessarily change to more collaborative models. There are two dimensions to this collaboration. The first is that development of learning systems is best done, and probably can only be done, by teams. A typical design team will consist of one or more content specialists, an educational technologist, a graphic or media designer, a psychologist or other expert in learning styles, and perhaps even a market researcher. Of course, these teams do not have to be located on a single campus. The second dimension of collaboration is that programs can be shared across campuses and institutions. Because of the high up-front costs of program development, there are powerful incentives for institutions to pool their resources and share development costs or to purchase programs that have been developed elsewhere. One existing model which illustrates both dimensions of collaboration is, ironically enough, sponsored university research. Major research projects are often team-based, and increasingly multi-institutional, multidisciplinary and multinational, so that the quality of the research can be enhanced and costly facilities can be shared. Such projects are far more competitive for grants. All of these conditions are becoming true for the development and delivery of academic programs as well.

True competition comes to higher education.
Colleges and universities believe they operate in a competitive environment, but they do so only on the margins. They are protected from true competition by the physical constraints of geography on student mobility, the hurdle of accreditation (with its burly bodyguard, financial aid), protectionist state policies like designated service areas, and the financial subsidy of public institutions. These barriers are falling--in some cases so rapidly that it is hard for public institutions to even know what is happening, much less develop a response. The new competitive environment is characterized by multiple providers--private for-profit institutions, industry-based education (which has grown beyond training), the emerging so-called edutainment industry, and public and private institutions that are seeking to serve students outside their traditional service areas.


Implications for State Higher Education
Finance Policy

States have funded public higher education institutions through a system of formulas, incremental budgets, and shared costs, which has remained relatively stable for several decades. However, the powerful forces described above are changing the assumptions upon which this system has been based. The technological revolution is not the only force changing state approaches to funding higher education. As state budgets have grown tighter, higher education's share has decreased in comparison to other cost centers like Medicaid, corrections and K-12 education. As institutions have shifted a larger share of their costs onto students, tuition has increased faster than the cost of living, per capita income and the availability of financial aid. Most new financial aid is in the form of loans, which has resulted in a substantial increase in student debt. Meanwhile, states face enormous pressures to fund increasing enrollments and faculty salaries, as well as investments in technology.

The following are some of the specific financial issues that states will need to address in the near future in order to respond to this rapidly changing environment.

Distance education
Distance education has moved from the fringes of the higher education system, where it was mainly a self-supporting enterprise that did not factor into state funding decisions, to a key role in meeting state access and economic development needs. Clearly, states need to develop better ways to fund distance education. However, doing so will require states to determine the role that distance education will play in state higher education systems and the relationship of distance education to more traditional modes of delivery of education.

Technology costs
States and institutions have committed significant funds to technology, and in many states students are also paying special fees to offset technology costs. However, states and institutions still consider educational technology mainly as an add-on cost and not as a recurring expense. According to a recent study, 78 percent of U.S. colleges and universities fund computer purchases (both hardware and software) from one-time budget allocations. These stopgap approaches do not reduce costs or increase productivity. It is time to consider how to restructure state financing to support the reengineering of higher education around the available technology. It may be that states will need to abandon current short-term, unit-cost-based funding approaches and develop in their place new approaches that encourage longer-term investments in course and program development. In this new environment, program development costs are higher than they are now but delivery costs are significantly lower. State unit-cost funding approaches will have to change to reflect this.

Competition
The natural monopolies of higher education institutions, at least in their immediate service areas, are rapidly coming to end as distance education, supported by advancing educational technology, grows in capacity. State funding policies have arguably become protectionist barriers to the expansion of alternative forms of higher education. States must carefully consider the extent to which they wish to encourage or support the development of a competitive environment for higher education.

Student costs
State and federal discussion of student costs has focused almost entirely on the perceived need to keep higher education affordable for traditional, full-time, residential students. States have, for the most part, assumed that students served by technology-mediated instruction will pay all or most of the cost of their programs. It is further assumed, for no good reason, that off-campus students should pay more than on-campus students (shouldn't the reverse be true?). State policies regarding tuition rate setting, student fees, and financial aid have not kept up with this rapid shift to technology-based instruction.

Collaboration
As direct instruction is replaced by more complex interactive learning systems, the cost structure of academic program development and delivery will necessarily change. Curriculum and program development will be team-based, and increasingly multi-institutional, multidisciplinary and even multinational. The incentives for collaboration will come from the need to share the high cost of program development, the ability to recover development costs by spreading them over a larger student base, and the quality enhancements that collaboration can offer. One implication of the need for greater collaboration across institutions is that state residency and tuition policies are becoming a barrier to the kind of collaboration that could yield significant cost savings and quality enhancements. Learner-centered education States will find it increasingly in their interest to support the mastery of competencies, and not just the accumulation of contact hours. Unfortunately, no one knows how to fund this shift in focus. As Steve Jordan put it at last year's State Higher Education Finance Officers meeting, "I know how to fund a full-time equivalent student. How do you fund a competency?"

Recommendations for Change
The changes brought about by the introduction of new information technologies to higher education will require the development of very new funding approaches for public higher education systems. The following ideas suggest some of the steps that states will need to take to restructure their systems of higher education funding, budgeting and financial planning.

1. States must develop new funding models that encourage investment in productivity-enhancing course and program development. The cost structure for technology-mediated instruction is completely different than for traditional classroom-based courses. The cost of traditional instruction is mostly the salary of instructors and their support services. Especially in the case of larger institutions, the marginal costs of traditional instruction are close to the average costs. Costs also tend to be the same year after year except for incremental increases to keep up with inflation. In contrast, the costs for technology-mediated instruction are more akin to those of software development. There are relatively high up-front costs for development. Ongoing delivery costs can be, however, lower than for classroom instruction. The cost of development can be amortized over the period of time that a course or program is used, which could be several years. As a result, it is difficult to fit the costs of technology-mediated programs into annual budget cycles. The answer may lie in replacing unit cost funding with new models-perhaps block grants, formulas that respond to both fixed and variable costs, or competitive grant programs.

2. States should seek the significant cost savings and quality enhancements that are possible on the non-instructional side of higher education through strategic use of technology. While most discussions of technology's impact on higher education, including this one, have focused on instruction, areas such as student services, libraries and administrative support can benefit even more rapidly from judicious use of technology. All these support services can and should be reengineered to take advantage of new technology. The SHEEO benchmarking study on electronic student services shows what is possible: cross-training personnel to perform multiple functions, combining previously discrete functions like admissions, registration and financial aid into a single office, handling most if not all administrative transactions with students via the Internet or telephone, and outsourcing services when possible. Obviously, in many if not most cases it will make sense to combine these functions across several institutions in a state or in other states. It is hard to see how this type of reengineering can occur without a significant revamping of current state funding approaches.

3. State funding, and other state higher education policies, should encourage collaboration across departments, institutions and states. It is critical to recognize that technology-mediated instruction is inherently collaborative. Whereas in the past (and present) there have been strong incentives for institutions to develop and deliver their own programs to capture maximum revenue, through collaboration the costs of technology-mediated program development can be spread over a larger base. By sharing courses and programs, and developing joint programs with other institutions, a wider range of programs can be offered while still maintaining acceptable levels of cost and quality. Unfortunately, state policies do not generally encourage collaboration. Funding formulas, program review and approval processes, institutional mission definition, and strategic planning can all make the development of collaborative programs problematic. States need to review all of their policies and get rid of those that do not encourage collaboration and the sharing of resources.

4. Residency policies and non-resident tuition have become counter-productive to states. When institutions and programs stayed put and students moved around, it made financial sense for states to charge a premium to students who came from outside the state. After all, they weren't voters and their parents weren't taxpayers. Now, however, it is in the financial self-interest of states to encourage their institutions to collaborate with institutions in other states. By doing so the development costs of programs can be reduced, risks can be shared, and delivery can be spread over a larger student base. Unfortunately, residency policies that discourage the interstate mobility of students also discourage the interstate mobility of programs. It may be time for states to reconsider whether restrictive residency policies continue to serve state needs and interests, or whether tuition differentials for nonresidents have outlived their usefulness.

5. As in other industries, competition in higher education should lead to deregulation. Until now, public higher education has been a regulated monopoly enterprise somewhat akin to a public utility. The opening of higher education markets to true competition, however, means that state policy can shift away from controlling the behavior of higher education institutions to ensuring the effective functioning of the higher education market. It will be less necessary for states to regulate institutions in areas like defining missions, reviewing programs and approving operating budgets and specific expenditures. It will be more important for states to contribute to the development of effective markets through such mechanisms as informing potential consumers of higher education of opportunities available in the system, disseminating information on student outcomes and other performance measures, and targeting resources to identified state needs. States will need to accept that they no longer control the higher education market and that public institutions are but one player, albeit a very important one, in the higher education system.

6. Funding should shift from seat-time to learning outcomes. States will inevitably come to realize that their primary interest lies in students achieving learning outcomes rather than simply accumulating student credit hours. States will need to find ways to pay for learning outcome assessments in much the same ways they pay for instruction. By reducing the per-student marginal cost of education paid by states, the strong incentive to keep students in classrooms will be reduced. States will find it in their financial interest to participate in initiatives that promise to develop new systems of assessing and credentialing student learning.

7. Performance-based funding is not the answer. Information technology is changing the structure of higher education-down to the level of the units upon which credit, credentials, workload and ultimately funding are based. It is entirely possible that some new system of course accounting based on learning outcomes will replace Carnegie units. If this happens, state approaches to funding higher education will go out the window. The inclusion of performance measures in current student credit hour-based funding formulas may be a worthwhile refinement which makes the formulas more responsive to state priorities and sound educational practice. However, performance-based funding does not change the fundamental basis of allocating funds for units based on seat-time, and therefore cannot respond to, much less bring about, the fundamental restructuring of higher education through information technology.

8. States must retain the ability to make strategic investments in their higher education systems. One cumulative effect of these changes is to make it more important for each state to treat its higher education institutions as a system, even if governance remains localized at the campus level. States should consider their higher education institutions as a set of resources, both human and programmatic, that can be applied strategically to meet state needs. As a consequence, states need to retain the ability to make system-wide strategic investments, for example in technology infrastructure or program development. Funding structures that allocate all funds to individual campuses do not permit states to act strategically when conditions warrant.


Reinventing Higher Education Finance

Enrollment unit cost-based funding formulas have served states and higher education institutions well, but may have come to the end of their life span. Replacing them will not be an easy task. The effort required to develop new funding approaches for public higher education systems may be similar in scope to that of developing the funding formulas in the 1970s, an effort that was undertaken by the federal government. No one expects the federal government to underwrite the development of new funding approaches today, so the question of how the major effort will be supported is unanswered. The responsibility obviously falls into the laps of the states, and in particular state higher education boards.

One thing is clear: It makes a great deal of sense for states to pool their efforts to develop new funding approaches. States' approaches to funding higher education are very similar--in some cases remarkably so. Over half the states rely on funding formulas that use the same system of classifying courses and programs, the same expenditure categories for institutional budgets, and the same approach to classifying and measuring costs. The financial issues faced by these states as information technology begins to transform their higher education systems are also similar.

Certainly states will need to exchange information as they develop and implement new approaches to funding. They may also have a greater need to share cost data and other financial information, especially about tuition, financial aid, faculty salaries, faculty workload and productivity, and distance education. In the same way that campuses will collaborate in program development, states may also find it advantageous to share the expense of developing new funding approaches. No one has yet demonstrated an approach to funding that addresses all the issues raised by information technology, but states are beginning to try new approaches that have considerable promise. The best of these strategies could be implemented across states as they make the transition to more fundamentally different ways of structuring and delivering higher education. Transitional strategies are particularly important because no one knows the extent to which higher education will be transformed by information technology, or the exact ways in which institutions and state systems will change. But change is coming, and states need to be ready.

All those with an interest in supporting the vitality of public higher education would do well to consider the need for new funding approaches and systems. Few continue to doubt that information technology will fundamentally transform the structure and delivery of higher education. Without change, state higher education funding structures could obstruct the ability of public higher education institutions to respond and adapt to the new environment resulting from the revolution in information technology. With the right kind of changes, however, state financing strategies can foster and support the transformation of higher education systems so public higher education will continue to play a vital role in the economic and social life of states.

Dewayne Matthews is director of student exchange and state relations at the Western Interstate Commission for Higher Education. [email protected]


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