Why Business Models are Inappropriate for University Communities


     Copyright © 2014 Bruce W. Hauptli


In their Draft statement “On Institutional Governance,” The Association of Governing Boards of Universities and Colleges maintains that:


...nonprofit colleges and universities differ from businesses in many respects.  They do not operate with a profit motive, and the “bottom line” of colleges and universities are far more difficult to manage.  They also differ from businesses in the sense that the processes of teaching, learning, and research often are at least as important as “the product,” as measured by the conferring of degrees or the publication of research results.  And by virtue of their special mission and purpose in a pluralistic society, they have a tradition of participation in institutional governance that is less common in and appropriate for business.[1] 


University Trustees, benefactors, supporters, and friends, however, are often tempted to try to apply a “business model” to universities when thinking about finances and employee relations.  I want to explain why this propensity can lead to disaster if it is not carefully restrained.  I will start on the financial side, and then turn to the topic of employee relations. 


    If non-profit universities are to be viewed on a business model, we need to recognize that even traditional non-profit business model may not provide the best comparison.  Universities not only don’t generate profits, they “sell” their products at a substantial loss!  Universities are in the business of improving people, expanding understanding and knowledge, encouraging scholarship and artistic creation, preserving culture, and serving their communities.  The contributions provided by their endowments, benefactors, foundations, grants, and alumni all provide “revenue” which supplements the tuition provided by the students to cover the costs of running the university.  In most cases these sources of revenue greatly exceed that provided through tuition. 


    Even if one considers only the activities of the university directly tied to the education of its students, such contributions are necessary to meet the expenses.  In fact most private universities devote substantial efforts to increasing these supplemental revenues which means that they, effectively, are trying to increase their operational-loss/tuition ratio—this behavior constitutes a gigantic differentiation from the accepted models of business financials!  Publicly-assisted universities differ from private ones in that they receive a significant portion of their funding from the state, and that contribution is provided because these universities fulfill an important public function—one which requires that these institutions “sell their product” at an even greater loss than that typical at “private” non-profit higher educational institutions.  None of this implies, however, that “bottom-lines” are unimportant to universities—the only implication is that one must be sensitive to the need to carefully apply the “business model” to the university environment. 


    Just as one needs to be careful applying “business financial models,” to a university; so one needs to be careful in applying “business employee relations models” to non-profit universities.  If one is looking for the best “comparative business model” to apply to these universities in the area of employee relations, I believe one should look at the models of a legal or medical practice.  In such businesses, those doing the essential labor are often called “partners.”  While many other “employees” in such businesses are centrally important, the partners are constitutive of the “practice”—they make it what it is.  They are highly trained prior to their employment, they are employed because of their intellectual abilities, and they are employed to utilize these abilities to accomplish the purposes of the practice.  While any individual partner is, of course, dispensable, collectively the practice is nothing without its partners.  Moreover, the very nature of the practice changes if the partners as a group don’t remain.  In short, the partners’ application of their intellectual abilities is essential to the practice’s success. 


    For this reason it seems odd to speak of these individuals as “employees”—and they are best thought of as “owners” of the practice—and, indeed, they frequently are its owners.  Clearly the analogy I am drawing to the non-profit university ends at this point!  The “owners” of public non-profit universities are the citizens of the state not the university faculty.  Moreover, the university’s administration and trustees exercise their authority on behalf of the citizens to ensure that the “practice” fulfills its public purpose.  That means, among other things, ensuring that the university faculty are properly utilizing their abilities for the purposes of the “practice.” 


    Nonetheless, it is important to recognize the unique role played by the university faculty as one administers them.  Academic administrators often refer to their primary activity as “herding cats;” and the independent, self-directed, internally-motivated character which typifies the professionals they administer makes the metaphor quite apt.  Indeed the talk of faculty members as professionals takes us to the root of the word.  Professors often take up their profession for its intrinsic benefits, and this makes them hard to manage, and very hard to manage well. 


    Let me elaborate upon what I mean when I say the faculty plays a constitutive role in the university.  Collectively, their role extends through all of the university’s central activities—without them this sort of “practice” becomes unsustainable.  Their collective continuity gives each university its particular character and identity, and their continuity is essential for curricular and programmatic success.  Academic administrators must facilitate the professional activities of their faculty, and trustees must oversee a university with a mind to ensuring that the faculty have the requisite facilities, equipment, resources, and benefits to do their job well.  Where this does not occur we confront a situation akin to a medical or legal practice wherein the “managing partners” so maltreat or demoralize the other partners that they leave—such a practice is one which is in its declining phase. 


    Now since I am a faculty member myself, all of this may sound like “special pleading!”  But I am not writing simply from the faculty perspective—for four years I served as a university trustee, and I took that responsibility most seriously.  Oversight, focus on accountability, and allocation of scarce resources are responsibilities of trustees and administrators, and this means that they should approach “employee relations” responsibly.  They must do so, however, with an eye on the role played by the faculty within a university, and this means that they should be as careful (if not more so) in applying the traditional business employee relations model to the university as they should be with the application of that financial model. 


    Perhaps the most discordant point of comparison between “normal business models” and the “university employee relations” model is tenure.  While tenure is often conceptualized as “...a property interest in continued employment formally conveyed to the employee by the institution as a guarantee that the employee will not be dismissed absent a showing of adequate cause,”[2] it is actually something far more than this.  Andrew Oldenquist points out that in addition to “job protection,” one of tenure’s major functions is “...the maintenance of a shared sense of community.”[3]  In his essay he clarifies some of the “communitarian” aspects of tenure pointing out that tenure and “communities” (the overall institutional community as well as the smaller college and departmental ones) should reinforce one another in a well-functioning university.  Where there is a shared sense of community, of course, there are a good number of clearly understood (and shared) values and goals.  Where there is no such shared sense of community, there is mystery and confusion.  I elaborate upon this in my Why Tenure Is Important. 


    In my statements on the nature of a liberal education, the relation of academic administration to collegial governance, and on academic freedom (all available on my web-site), I emphasize the importance of conceiving of a university as an academic community.  Where the university’s faculty conceive of their institution simply as “their employer” (or when a university administration or Board of Trustees conceives of the faculty simply as “their employees”), the bonds of such a community are seriously broken.  In such cases the university is in danger of loosing its central constitutive element.  It is like the legal or medical practice in serious decline mentioned above. 


    Donald Kennedy, President Emeritus of Stanford University, notes that “the composition and quality of the faculty is the single most important determinant of the character and prestige of the university; thus the power of appointment, formally delegated to the President but de facto a matter for faculty decision, is the most important power there is.”[4]  If the appointment of faculty is this important, then the granting of tenure is a clearly the next most important determinant of how a university constitutes itself as an academic community.  Those who are granted tenure become continuing members of the community for an extended period of time, and they play a special role (both in the breadth of their participation in the varied activities that a university engages in, and in the length of the time they so participate—unlike students, staff, administrators, trustees, and alumni).  They become the “partners” who make the “practice” what it is, and their “tenure” is what guarantees them the freedom, responsibility, and authority to exercise this particular role.  They have a crucial role in the hiring of new faculty members, the formulation of the curriculum, the delivery of instruction, and in the scholarly, creative, and research activities of the institution.  They make the “practice” what it is! 


    Universities are not short-term enterprises.  They are created as continuing enterprises and decisions to add programs or change the fundamental character of universities are of the greatest import.  First, and most obviously, from a financial point of view, the decision to take on an additional “loss-center” is something that should be very carefully contemplated.  From the personnel perspective, however, adding programs means adding and expanding expertise.  If a legal or medical practice decides to expand its practice into a new area, this means expanding the partnership and building the requisite expertise of the partners.  Such decisions are expensive and must be undertaken with the utmost care.  In the case of universities, however, such decisions are long-run ones, and they constitute commitments by the institution to its students, alumni, and community that it will provide a new continuing resource. 


    Clearly there will be periods of severe financial crisis, or conditions may emerge which necessitate deliberative decision that a significant alteration in the character of the academic community is necessary.  In such situations there may be a need to close programs and lay-off tenured faculty members (I experienced this as I served as a Faculty Senate Chairperson and University Trustee).  Where such is called for there should be not only the best of personnel practices, but there should also be careful community-wide consideration of the issues.  Since universities are continuing practices with long-run goals and commitments, retrenchments should be rare, and must be even more seriously deliberated upon than are the decisions to expand the “practice.”  Tenure makes such decisions more difficult—and this is as it should be.  Such decisions should not be undertaken lightly.  A university that doesn’t plan carefully for its future and expands itself beyond what it can sustain, like a legal or medical practice that does so, is likely to find itself loosing its character and prestige.  It will run the serious risk of loosing many of its “partners,” and may find that its retrenchments go far further than planned.  Only the careful involvement of the academic community at large in the discussion of such matters can help the community survive such a situation, and this means that any temptations to adopt the more typical business model of employee relations will be potentially destructive rather than constructive. 


    Of course none of these remarks apply where one is talking about for-profit institutions of higher education.  But then I think such entities are oxymoronic—they don’t really exist except in the minds of entrepreneurs who seek to separate fools from their funds, and in the minds of those who seek to become “certified” rather than “educated” (or are so unfortunate as not to be aware of the difference).  In higher education one doesn’t get what one pays for, one gets more; and where that supplement does not exist, it is likely one isn’t getting something of real enduring value, let alone what one is paying for. 


Notes: (click on the note number to return to the text for the note)


[1] The Association of Governing Boards of Universities and Colleges, Draft statement "On Institutional Governance," as it appeared on their web-site on September 7, 1998, p. 3. 

[2] Joseph Beckham, Faculty/Staff Nonrenewal and Dismissal for Cause in Institutions of Higher Education (Ashville: College Administration Publications, Inc., 1986), p. 5. 

[3] Andrew Oldenquist, “Tenure: Academe’s Peculiar Institution,” in Morality, Responsibility, and the University, ed. Steven .M. (Philadelphia: Temple U.P., 1990), pp. 56-75, p. 62. 

[4] Donald Kennedy, Academic Duty (Cambridge: Harvard U.P., 1997), p. 127. 


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Revised on: Revised: 04/30/2014