Dynamics of Higher Education in the US

1
Dynamics of Higher Education in the US
July 2007
This material was used by McKinsey Company
during an oral presentation at State Higher
Education Executive Officers Conference it is
not a complete record of the discussion.
2
OUTLINE

• SCP an interesting lens for looking at higher
  education
• Strong historical performance driven by favorable
  structure and relatively benign conduct
• Performance gt health (?)
• Potential shocks
• Demand, supply and environment elements all in
  play
• Challenges, but also opportunities
• Variability between segments on the rise
• Industry level response may be needed

3
ELEMENTS OF THE SCP MODEL
Producers
Industry
Nature of demand Nature of supply Industry
chain economics
Marketing Capacity change Vertical
integration Internal efficiency
Financial Technological Employment
Source McKinsey
4
INDUSTRY CHAIN FOR EDUCATION SECTOR
Input providers
Customers
Producers

• Students (15M)
• Employers
• State general education funders
• Research funders
• Donors (major and small)

• Universities and colleges
• 4,400 institutions
• 350 B revenues

• Faculty (1.2M)
• Administrative/other staff
• Providers of goods/services

Source National Center for Education Statistics
IPEDS
5
HIGHER EDUCATION SEGMENTS VARY ACROSS MULTIPLE
DIMENSIONS
Undergrad/ graduate ratio
Tuition and fees (thousands)
Student/ faculty ratio
Total FTE students (thousands)
Average SAT
Institutions
Top private research
20
1
1407
293
30
6
Other private research
393
3
1082
1,472
18
14
Top private liberal arts
50
37
1331
98
29
10
Liberal arts or general
445
24
609
15
1054
16
Top public research
36
4
1209
1,060
6
12
1041
5
Large public
349
6
3,953
16
Small public
145
11
1001
349
5
16
2-year/associates
1,253
N/A
934
4,549
3
19
For profit
910
5
1053
806
12
18
Specialized institutions
623
3
1061
323
10
7
Total
4,224
8
1070
13,512
9
15
Source National Center for Education Statistics
IPEDS dataset, 2004 U.S. News World Report
Best Colleges, 2006 NSF Research and
Development expenditures data, 2004 McKinsey
team analysis
6
SHARE OF ACTIVITY VARIES WITHIN AND ACROSS
SEGMENTSpercent
Grad students
Research
Institutions
Undergrads
Top private research
0.5
1
8
24
Other private research
9
9
24
9
1
1
0
0
Top private liberal arts
Liberal arts or general
11
5
2
0
1
7
14
32
Top public research
24
Large public
8
28
36
Small public
3
3
2
2
2-year/associates
30
38
0
0
For profit
22
6
8
0
Specialized institutions
15
2
6
9
Source National Center for Education
Statistics IPEDS dataset, 2004 McKinsey team
analysis
7
FAVORABLE STRUCTURE

• Demand
• Consistent growth for education, high growth in
  research
• Valuable product, few/no substitutes
• Supply
• Highly fragmented, diverse producer segments
• Limited international competition for US students
• Modest supply additions
• Industry Chain
• Producer power varies by segment, but undemanding
  with the exception of faculty
• Limited information availability

Source McKinsey team analysis
8
FAIRLY BENIGN CONDUCT

• Marketing
• Growing outreach/marketing
• Significant price increases partially offset by
  increasing discounting
• Incremental product innovation
• Internal efficiency
• Increasing competition for top faculty
• Facility wars
• Flat to declining productivity
• Limited capacity expansion
• Few competitors target growth
• Few vertical/ horizontal alliances at
  institutional level

Source McKinsey team analysis
9
WITHIN U.S., PERFORMANCE HAS BEEN SURPRISINGLY
STATIC
U.S. News and World Report Best National
University Rankings

• University

2006
1993
Big movers
Harvard University
1
1
Princeton University
1
2
Yale University
3
3
M.I.T.
7
4
California Institute of Technology
7
5
Stanford University
5
6
Duke University
5
7
Dartmouth College
9
8
University of Chicago
15
9
Cornell University
13
10
Columbia University
9
11
Brown University
15
12
Northwestern University
12
13
Rice University
17
14
Johns Hopkins University
13
15
University of Pennsylvania
4
16
Georgetown University
23
17
Washington University in St. Louis
11
18
20
18
University of Virginia
23
21
UCLA
25
22
University of Michigan Ann Arbor
25
23
22
University of Notre Dame
18
25
Emory University
20
25
Moving up or down 5 or more spots in U.S. News
and World Report university rankings Source US
News and World Report Fortune Magazine, Fortune
500
10
U.S. HAS DOMINANT SHARE OF TOP INSTITUTIONS
8
Times Higher Education rankings1
Shanghai Jiao Tong rankings2
2
17
1
57
ROW
2
32
ROW
9
2
4
18
69
Asia
2
5
31
Asia
8
56
Europe, non-UK
5
164
Europe, non-UK
59
22
8
United Kingdom
8
43
37
United Kingdom
7
24
87
20
United States
United States
167
54
Top 10
Top 50
Top 200
Top 10
Top 50
Top 500
Top 200
1 Based on peer review (40), faculty/student
(20), citations/faculty (20), recruiter reviews
(10), international faculty (5) and
international students (5) gt500 rated as
excellent 2 Based on Staff winning Nobel Prize
and Field Medal (20), staff citations (20),
articles in Nature and Science (20), Science and
Social Science citations (20), alumni winning
Nobel Prize and Field Medal (10), size of inst.
(10) gt2000 universities scanned and gt1,000
universities ranked Source The Times Higher
Education Supplement Shanghai Jiao Tong Academic
Rankings of World Universities McKinsey team
analysis
11
HIGHER EDUCATION CAPTURING A GROWING SHARE OF
PHILANTHROPIC SUPPORT
22
S
C
P
U.S. Philanthropic Contributions 2005 Billions
Higher Education Share Percent
Contributions to Higher Ed 2005 Billions
130
10.1
1,281
9.8
170 increase
110 increase
8.0
76
770
597
49
1980-1984
2000-2004
1990-1994
1990-1994
2000-2004
1980-1984
1990-1994
2000-2004
1980-1984
Source Giving USA, Council for Aid to Education,
Center on Wealth and Philanthropy, AFRC Trust
McKinsey team analysis
12
UNIVERSITIES HAVE COMPETED SUCCESSFULLY FOR RD
FUNDING
102.721
S
C
P
Federal obligations for RD by performer
billion Percent of total
CAGR 1984-04
102.721
4,5
3,9
Intramural
24
67.235
24
Industry
39
3,5
42.225
27
47
Universities and Colleges
7,6
23
48
18
3,5
University FFRDCs
5
13
5
6,6
Other
8
6
6
6
1984
2004
1994
Federally Financed RD Centers Sources
National Science Foundation/Division of Science
Resources Statistics team analysis
13
ACADEMIC RESEARCH HAS ECONOMIC AND SOCIAL VALUE
38
Economic growth job creation1
Knowledge Creation and Growth1,3
Innovation Invention2
Academic Research
Graduates Trainees
Contracts, Collaborations Consulting
1 Lynch and Aydin, Literature Review of the
Economic and Social Impact of Higher Education
Funding, 2004 2 AUTM FY2002 Licensing Survey 3
Zerhouni, NIH At the Crossroads, U.S.
Congressional Joint Economic Committee, Benefits
of Medical Research and the NIH, 2000
14
HIGHER EDUCATION PROVIDES HIGH ECONOMIC VALUE AND
ACCESS TO THE FASTEST GROWING JOBS
882
S
C
P
Degree requirements, 2004-20142 Percent
Lifetime earnings 1 Thousands
4,509
0.9M
3,627
Of all fastest growing jobs (n30)
1.2M
Masters/ Doctorate
No college
2,444
17
33
53
Bachelors
Associates
Bachelors only
Grad school
High school only
Note Grad school is weighted average of Masters,
professional and doctorate degrees. Includes
opportunity cost of salary forgone during
education. 1 U.S. Bureau of Labor Statistics 2
Hecker, Daniel, Occupational employment
projections to 2014, Monthly Labor Review,
February 2002 McKinsey team analysis
15
HOWEVER, INSTITUTIONS ARE NOT MEETING NEEDS OF
ACCESS AND AFFORDABILITY
Graduate high school with a diploma Percent
Of population, graduate college Percent
0-24,999
25,000-49,999
Income
50,000 and up
Asian/Pacific Islander
White
Race/ ethnicity
Black, not Hispanic
Hispanic
27 overall college graduation rate
75 high school graduation rate
Source NELS 88/00 Education Policy
Institutes 2005 Global Higher Education
Rankings National Center for Public Policy and
Higher Educations 2006 National Report Card
McKinsey team analysis
16
TRENDS AND POTENTIAL SHOCKS

• Increasing numbers of highly digital, frequently
  non-traditional students
• Price-cost-productivity squeeze
• Globalization
• New paradigm competitors
• Accountability

Source McKinsey team analysis
17
TREND 1 MORE NONTRADITIONAL STUDENTS
12
U.S. undergraduate students2 2004, 100 14
million
2 year, part-time
Traditional
Non-traditional
4 year, Part-time
4 year, full-time, lt25 years
2 year, full-time, 22 years
Public 2-year (18 growth)
4 year, full-time, 25 years
Public 4-year (16 growth 94-04)
2 year, full-time, lt22 years
1 Chronicle of Higher Education 2006 Almanac
McKinsey team analysis
18
HIGH GROWTH RATES PAIRED WITH EMPHASIS ON COLLEGE
READINESS COULD DRAMATICALLY INCREASE ENROLLMENT
22
Percent of high-school graduates college ready
U.S. population at high-school graduation age 1
High-school graduation rate
College-ready graduates per year
2004
4.1 million
702
344
1.0 million
130 increase in college-ready students
2014
4.2 million
853
663
2.3 million
1 US Census Bureau (http//www.census.gov/populati
on/www/projections/natsum-T3.html) 2 The Silent
Epidemic (Bridgeland, et. al) March 2006 gives
68-71 3 Gates Foundation goals, largely
consistent with Spellings recommendations 4
College readiness defined by Greene and Winters
(2005) as the basic skills and qualifications
necessary to be accepted by a 4-year college (1)
graduate from high school with a regular diploma
(2) minimum level of academic coursework (3)
basically literate (pass NAEP reading test). Most
recent data from 2002
19
DIGITAL GENERATION WILL EXPECT A DIFFERENT
COLLEGE EXPERIENCE
5
Source Teen Research Unlimited
20
TREND 2 PRICE-COST-PRODUCTIVITY SQUEEZE
813

• Average tuition and fees1
• Real 2004 dollars

33.5 15.3
Private
34 growth 94-04
Public
48 growth 94-04
1 College Board, Trends in Student Aid (2004) 2
National Center for Education Statistics IPEDS
dataset, 2004 McKinsey team analysis
21
THE RICH ARE GETTING RICHER
15
University Endowments billion Percent of
total Top 100 Universities
Total growth
CAGR
218
10.6
175
11.7
196
64
79
157
9.9
20
60
Top 20
21-50
21
16
8.6
128
51-100
19
1995
2005
Sources NACUBO Endowment Survey, 1995-2005 team
analysis
22
INSTITUTIONAL COSTS ARE CONTINUING TO RISE
54
Increase in instructional cost per student
1984-20041 Percent, adjusted for inflation
Increase in administrative cost per student
1984-20041 Percent, adjusted for inflation
Top public research
Large public
Small public
Top private research
Other private research
Top private liberal arts
Liberal arts or general
2-year/associates
For profit
Specialized institutions
Average
1 National Center for Education Statistics,
IPEDS dataset, 2004 and 1984 McKinsey team
analysis
23
DECLINING PRODUCTIVITY
-5,8
Change 89-2004 Percent
Student per faculty FY2004 Ratio
Top private research
Other private research
Top liberal arts
Liberal arts or general
Top public research
Large public
Small public
2-year/associates
For Profit
Specialized institution
-3,2
15,1
Average
Sources National Center for Education
Statistics,IPEDS dataset team analysis
24
TREND 3 GLOBALIZATION
2003
Offshoring
2008
Packaged SW

• Globalization as the process of economic and
  social integration that intensifies competition
  and gives rise to innovation by
• Opening of geographic, capital, labor and other
  resource boundaries
• Increasing exposure to ideas, concepts, processes
  and organizations

IT services
Retail banking
Pharma
Rising global competition Millions of students,
1999-2004
CAGR
China
25
U.S.
4.
25
HIGHER EDUCATION RESPONSE TO GLOBALIZATION

• Potential institutional responses
• Expanding international recruiting
• Shifting research agenda
• Globalizing the student experience
• Internationalizing faculty
• Establishing a central office to guide thinking
• Enhancing global presence

• Key issues
• But international students represent less than 5
  of demand for US institutions
• Needs vary greatly by segment
• Will these actions alter structure or conduct
  balance?

Source McKinsey Quarterly
26
TREND 4 NEW PARADIGM COMPETITORS
22

• Distance learning offered by 17 percent of
  schools in 2000-2001
• Online education growing part of long-term
  strategy
• 7 of postsecondary students completed studies
  over the Internet

Growing market

• 96 of companies prefer traditional degrees to
  online degrees
• 75 prefer traditional degrees over hybrid
  (partial online)
• However, 50 of another survey showed equal value
  for online and face-to-face instruction

Increasing credibility
Removal of regulatory barriers

• Federal student-aid available for
  distance-learning institutions as of February
  2006
• Credentialing by testing may prove to be boon

Source The Chronicle of Higher Education, 2006
New York Times, Degrees of Acceptance National
Center for Education Statistics Growing by
Degrees, Allen and Seaman, 2005 McKinseyteam
analysis
27
ADVANTAGED ATTACKERS?
University of Phoenix
Open University (UK)

• Nonprofit, created by UK Government
• Open access to all looking to learn
• 200,000 students, most part-time, 25,000 live
  outside UK
• Wide range of courses, certificates, degrees
• High student satisfaction and rated 5th best in
  UK for teaching quality
• Extensive use of technology
• Cassettes/DVDs
• TV programs
• Online
• Conferencing system
• Home-kits
• Expanding to Africa

• For-Profit owned by Apollo Group
• Applied professional education for working adults
• 255,000 students, 28 purely online
• 28 increase in students since 2003
• 250 campuses/learning centers
• 110 degree programs, completed in as little as 20
  months
• Extensive use of technology
• Electronic textbooks, Online Library
• Simulations, virtual organization sites
• WritePoint SM

Source Apollo Group, OU website
28
TREND 5 ACCOUNTABILITY
Improve college readiness and other pathways to
higher education Bolster funding and streamline
financial aid processes Reward and measure
productivity and efficiency Better track and
communicate student learning outcomes Incent
innovation and collaboration (e.g. shared IT
resources) Expand reach to adults and improve
vocational training Increase support for research
funding, especially target subjects
Source Commission on the Future of Higher
Education McKinsey team analysis
29
FINAL THOUGHTS

• Trends consistent with broader global trends in
  many industries
• New era of fracturing along segment lines
• Real need for paradigm change in the vast
  middle as the cost model is deeply flawed
• As many opportunities as threats with some
  institutions better positioned to break out
• Sector response valuable in several arenas
• Embrace some Spellings recommendations
• Recognize need for multiple paradigms