Universities as Non-Profit Conglomerates

March 8, 2011

Mission creep is the bane of the modern university.  Once upon a time universities believed that their mission was the discovery and dissemination of knowledge.  Accordingly, they focused on teaching and research.

Universities are now straying far from this core mission and launching an array of new enterprises.  They run health-care systems, engage in property re-development, serve as venture capitalists for start-up businesses, etc…

To reflect their new status as non-profit conglomerates, universities espouse missions that are only tangentially related to their previous core function of education.  No longer do universities emphasize their founding mottos, such as “veritas” or “disciplina in civitatem.”  Instead, we see Ohio State University calling itself the “economic engine” of Ohio and declaring “We’re in the progress business.”

No they aren’t.  At least, they shouldn’t be.  They are in the knowledge business.  Universities forget this at their and everyone else’s peril.

The more that universities see their mission as progress or being an “economic engine,” the more they are straying into business at which they are less competent, on which they lose more money, and which distract them from their core responsibilities.

We have had experience with profit-seeking industrial conglomerates in the 1970s and it didn’t go very well.  Businesses grew large, unfocused, and overly bureaucratic.  But in the business-world, there is a remedy for this type of gross inefficiency.  Corporate raiders took-over these conglomerates and made a fortune breaking them up and selling off the pieces.  They realized that these businesses would be much more effective if they weren’t combined in a conglomerate.

The non-profit sector lacks a similar remedy.  Universities are expanding into a variety of businesses and there is no one to stop them other than a board of trustees which has been fully-co-opted by administrations (just as the boards of industrial conglomerates were co-opted by their management teams).  Raiders can’t purchase the grossly inefficient non-profit conglomerates masquerading as universities and make a fortune by breaking them up and selling off the pieces.  Instead, we increasingly suffer from administrative bloat and inferior quality education.

The only prospect for these non-profit conglomerates to be broken-up is that they tend to lose more money with each new venture.  We shouldn’t expect universities to be efficient at operating health-care systems, property re-development, or venture capitalist operations.  They claim to be attracted to each new enterprise as a way of making money to subsidize their core functions, but the reality is that their losses pile-up and their administrative over-head swells as they experience mission creep.  They all fantasize that their venture capitalist efforts will spawn the next Google, but I am willing to bet that the average return on start-up businesses for universities is negative.

Returning to our Ohio State University example, their total annual revenue has grown to $4.7 billion.  It becomes very difficult to run a $4.7 billion business that also teaches individual students well and conducts quality research.  As OSU’s president, Gordon Gee, describes his institution: “Universities are large and complex — ours more so than any other. Trying to describe all that we do in one sentence seems a daunting task.”  Gee, President Gee, maybe that should be a sign that OSU is trying to do too many things.

Of the $4.7 billion in annual revenue, OSU gets $2.3 billion from its Medical Center.  Why should universities also operate gigantic health care systems?  I understand that universities may want a relationship with hospitals to help train their students and provide opportunities for research, but frankly that can be done without having to own them.  And even if it were efficient to own a hospital for teaching and research opportunities, there is no reason to own an entire network of medical  facilities and services.

I’ll bet that OSU requires large government subsidies for both its medical and traditional educational operations.  And I’ll further bet that those loses could be reduced, on both ends, if they spun off their Medical Center.  The reasons to combine them and to add a host of other “economic engine” activities is not financial or educational efficiency.  The reason is to satisfy the desire for empire building among senior university officials and their compliant boards.

We may not have corporate raiders to break-up these non-profit conglomerates, but we will eventually have angry taxpayers who grow tired of subsidizing their losses.  When the subsidies get cut, universities will be forced to shed these extraneous and money losing ventures and focus once again on teaching and research.