Earnings from Learning: The Rise of For-Profit Universities

5. Profit Centers in Service to the Academic Core

Chapter 5 Profit Centers in Service to the Academic Core Dudley Doane and Brian Pusser INTRODUCTION Since the late 1990s, the role of entrepreneurial revenue generation in the financing of public and private higher education in the United States has received significant attention (Pusser, 2002; Heller, 2001; McKeowan-Moak, 2000; Goldstein, 1999; Kane, 1999; McPherson and Schapiro, 1998). Interest in the topic can be traced to a variety of sources, including the following: declining state subsidies (Winston, Carbone, and Lewis, 1998); rising costs (Ehrenberg, 2000); changing demographics (Carnevale and Fry, 2001; Hudson, 2001); shifting operating environments (Levin, 2001; Adelman, 2000); competition with for-profits (Pusser and Turner, 2004; Marchese, 1998); and assumptions among some policy makers, researchers, and stakeholders that the organization and finance of higher education should be based on a market-production model (Munitz, 2000; Friedman, 1962). For the purposes of this research, entrepreneurial revenue generation is defined as those institutional activities that produce revenue without significant direct state support. In many cases the revenue generated may significantly exceed costs (as in university development), although more generally these activities either break even or require institutional subsidy. It is worth noting that under this definition a great deal of revenue generation in private institutions, nonprofit and for-profit, can be characterized as entrepreneurial. Entrepreneurial revenue generation in public institutions is in many ways a distinctly different phenomenon (Pusser, 2002; Slaughter and Leslie, 1997). State financial support of public nonprofit institutions has traditionally been provided for activities close to the academic core, fundamentally directed to undergraduate education and to other activities that have been seen as preferred and legitimate institutional activities (Slaughter and Leslie, 1997). Student tuition has also historically been tied to academic activities close to the core. Although tuition is not a form of direct state support, tuition levels and 93 the uses of tuition revenue have historically required state approval, or at least tacit state political support. While the research presented in this chapter was conducted in public research universities, the issue of entrepreneurial revenue generation from core academic activities has significant implications for both public and private institutions. NEW ENTREPRENEURIALISM An enthusiasm for entrepreneurial approaches to academic organization in general, and to revenue generation in particular, has accompanied efforts to address the changing financial dynamic of postsecondary institutions (Ruch, 2001; Ehrenberg, 2000; Peterson, Dill, and Mets, 1997). The case for entrepreneurial reorganization has been most often made in literature on for-profit higher education (c.f. Sperling, 2000; Ruch, 2001) but is by no means limited to work on proprietary institutions. Researchers have also examined entrepreneurial activities and diversification of revenue sources among nonprofit public and private colleges and universities (Winston, 1999, 1997; Hansmann, 1980). S. Oster (1997) studied revenue-generating auxiliary enterprises within institutions that enjoy 501 c (3) status. More recently, many nonprofit universities have extended their reach and generated significant revenue by offering courses, degrees, and training through continuing education and extension programs (Levin, 2001; Pusser and Doane, 2001). The importance of increasing nontraditional sources of revenue is leading both nonprofit public and private institutions to increase their production of what Burton Weisbrod (1998) labels “nonpreferred goods”—goods produced to generate revenue in support of preferred activities as opposed to the direct production of the preferred goods or activities themselves, those outputs that are directly related to the mission of the institution. Although the diversification of revenue sources has helped a number of public colleges and universities weather reductions in the proportion of their operating budgets covered by state funding, dependence on commercial activities, or the production of nonpreferred goods, to finance traditional or “preferred” activities may yield unintended consequences. It has been argued that the variety and complexity of entrepreneurial revenue -generating activities can require substantial resources for support and oversight as part of a vast expansion of “academic capitalism” (Slaughter and Leslie, 1997). Units such as endowment offices, real estate foundations, and patent offices, are home to a growing cadre of professionals and numerous support staff (Ehrenberg, 2000). It has been observed that over the previous three decades faculty have ceded considerable influence to professional administrators (Marginson and Considine, 2000; Rhoades, 1998; Slaughter 94 PROFIT CENTERS IN SERVICE TO THE ACADEMIC CORE and Leslie, 1997). The growth in the production of nonpreferred goods by universities has also contributed to the increasing tension between legislatures and state public institutions. As universities have become ever more complex, conglomerate organizations, institutional demands...