The Single Greatest Change Required for Contemporary Leadership: It’s About People

I have written several articles about how the required knowledge, skills, abilities, and traits for successful leadership have changed, rather dramatically, over the last 15 to 20 years. One article included more than two-dozen ways in which the new leadership model has evolved! But the single greatest shift in what is required from leaders today is the required focus on people and “people issues.” There are many reasons for this, both internal to organizations and externally, related to profound societal changes as well, but the bottom line is that success as a leader today is more about effectively understanding and working with people than ever before. And this has happened at the same time that human capital and teamwork in organizations are collectively a more critical resource and competitive advantage than ever before. As a result, the cost of leadership failures related to people are also higher than it has ever been!

Although contemporary, strategic leadership includes many “new” skills and attributes that apply to leading in complex, uncertain, high-change environments, effective people leadership has become so foundational, that its absence compromises other ways in which leaders may be exceptionally competent. In other words, being a brilliant strategist or having deep business acumen may be nearly irrelevant if one cannot effectively connect with and empower the people in an organization. To be fair, organizations have always benefitted from leaders with strong people skills. That is not new. What is new is the centrality of that need and the growing complexity of “people issues” that leaders have to effectively address.

So, what are the key elements of people leadership?

Many of these elements are affective and intuitive and have almost never been central to leadership development. They are as much personal traits as they are skills, and include things like empathy, emotional/cultural intelligence, authenticity, and vulnerability, which is itself a prerequisite to courage.

In this context, knowledge of organizational dynamics and human psychology may supersede knowledge of finance and operational expertise, which only a few years ago would have been “heresy” in the leadership cannon. And possibly more importantly, effective people leadership requires that that the leader be dedicated to and purposeful about his or her own human needs and well-being!

At its core, people leadership is about achieving success through others. It is ensuring that human beings in the organization feel valued, heard, respected, and empowered to embrace risk—to be safe to show their own vulnerability—and that the organization supports collaboration and teamwork. It is about relational skills rather than operational skills or “business acumen.” And it requires exceptional patience, kindness, and sensitivity to the humanity that each individual employee brings to an organization.

How do leaders build these traits and competencies?

One hard reality is that some individuals are simply not good candidates for the kind of leadership that is necessary today. Although a strong, ego-driven, directive style was desired in leaders a generation ago, that is actually demotivating and alienating to many employees today. Likewise, those with poor self-awareness, but strong technical skills, may have been able to achieve performance objectives a generation ago, but are not great leadership candidates today, because self-awareness is central to emotional and cultural intelligence, which are both essential to people leadership. Having said that, as with many other skills and attributes, if one is motivated enough, he or she can learn just about anything and can change behavior as well. What might that look like in the context of becoming a more effective people leader? It starts with self-reflection, which itself is quite different than traditional leadership development, which has historically been based on skills development rather than personal self-actualization.

Here are some good ways to start:

In short, some of us are naturally better wired to meet the challenges of the single greatest change in contemporary leadership: leading people to create success through others. For some of us, the required traits, skills, and behaviors are more of a stretch. Regardless, anyone with the proper motivation can progress along the continuum to more effective and powerful leadership in today’s complex and often volatile, people-centric environment. It requires a lot of self-awareness and self-reflection, but it also confers great benefits on us personally, so it is a win-win!

In the Eye of the Storm: Despite Unprecedented Threats and Increasing College Closures, Almost No One Has a Plan

Due to the nature of my work, I have many, in-depth conversations with people in universities, on boards, within accreditation and professional organizations, recruiters, higher education vendor-partners, publishers, investors, regulators and others that provide a very deep and broad view into the realities of higher education today.

Although more institutions of higher education (IHEs), particularly private institutions, are finally coming around to the realization that something is going on, and it’s not good, there is a remarkable shrugging of shoulders about what is, for many schools, an existential crisis. Even using overly conservative predictions based on current closure rates that will almost certainly get worse based on the declining demographic and economic realities facing IHEs, at least two to three hundred colleges and universities will fail in the next ten years. And that number does not include the many more “walking dead,” that will technically be open, but insolvent. While the student debt crisis gets most of the media attention, institutional debt has increased by nearly 65% in the last five years and now exceeds two hundred billion dollars—and the impact will get much worse as institutions must divert more and more precious cash to debt service in the face of declining enrollments and revenue.

It seems that institutions of higher education are unique in their collective powers of denial. Only a few years ago, nearly 800 colleges and universities were suddenly at risk of closure when their accreditor was sanctioned by the U.S. Department of Education. The sanction provided for roughly 18 months before the accreditor would be shut down and its accredited institutions would no longer qualify for federal financial aid. A few months into the crisis, I spoke with 23 member institutions and only one had any kind of actionable plan for moving to another accreditor—and they all knew with certainly both the timeline and the outcome! The only reason many of those institutions are still operating today is because there was a court stay against the closure.

Similarly, I was recently working with a private university and after reviewing financial statements (balance sheet, P&L, and cash flow) with their CFO, it became clear that not only were they in the fourth year of a substantial revenue decline, but that on any given day they had only a few weeks of operating cash on hand. In subsequent conversations with board trustees, it became clear that they did not fully understand the situation, and as a result, the board level priorities and planning were completely disconnected from the reality faced by the university. This disconnect is a painfully common situation in higher education.

All of the institutions that have reorganized, merged, and closed in the last several years offer a harsh reality check of what happens when senior administration and/or boards either don’t know what is going on, or know what’s going on, but don’t have a plan. It is inevitable that some substantial number of colleges and universities will not survive the current contraction and that number is at least in the hundreds if not much higher. One thing that will set apart those who will survive and thrive from those who will struggle and fail is the simple fact of having a plan!

I have written previous articles describing what we already know about schools that are thriving now. The model is not a mystery, but execution is key—and having something to execute is even more fundamental. Part of my consulting work is partnering directly with institutions to determine the delta between what needs to be true vs. what is actually true in those institutions in terms of surviving and thriving going forward–and this includes both operational strategies and organizational culture and behaviors that support success in ambiguous, complex, high-change environments. Unfortunately, as with the accreditation crisis mentioned previously in this article, the vast majority of IHEs either do not fully understand the current existential reality and/or they do not have any actionable plan to deal with it. Some simply misconstrue a “need to grow enrollment” or “cost cutting” as a plan. It is not. On the other hand, for those colleges and universities that are enlightened and do have a plan, that simple fact alone is a huge competitive advantage going forward.

Why Humility and Vulnerability Are Core to Strength and Courage—And Essential for Today’s Leaders

I have written multiple articles on leadership, and in particular, how previous leadership models are becoming less effective and even potentially detrimental in contemporary organizations. I have referenced new elements of leadership that are not only quite different behaviorally, but also look and feel different from a values perspective as well. In fact, as contrary to traditional leadership models as it sounds, humility, vulnerability empathy, and self-awareness are the most critical personal characteristics a leader can have today.

Why is this?

We have been socialized to see vulnerability as weakness, which is the exact opposite of what is true. Humility and vulnerability are at the core of strength and courage. Vulnerability is the courage to take a risk, to put yourself out there, when you can’t control the outcome. Humility is the strength to admit that even if you’re the CEO, you don’t have all the answers, and that you need help to succeed. In fact, any random three people in an organization, working as a team, will consistently make better decisions and do better work collectively that even the highest performance individuals and leaders. Emotional intelligence (EQ) requires deep self-awareness and empathy, and because leadership is becoming more about effectively understanding, supporting, and empowering people in organizations, EQ has become central to leadership efficacy.

To be clear, this is not just an opinion about the value of vulnerability, humility, and emotional intelligence for leaders today. It is based on nearly 20 years of research by Dr. Brené Brown, with tens of thousands of subjects. It is some of the most compelling and convincing psycho-social leadership data available today. It also happens to be common sense.

Unfortunately, however, as operating environments get more volatile and organizations struggle to achieve performance objectives, executive leaders and boards tend to “double down” from a place of fear, defaulting to absolutely wrong, reactionary decisions. They look for leaders with strong, “executive” personalities and styles who can take a “firm hand” in the organization, tasked with reducing complexity, limiting change, centralizing control, and going “back to basics.” Or, more simply, they just do what they’ve always done and choose leaders that look familiar. This is a huge mistake because complexity and volatility are now intrinsic to operating environments—they are not variables that can be controlled by leaders—and trying to slow down change is a fool’s errand regardless. On the contrary, organizations today need people experts, who can empower entire organizations to innovate—which also happens to be the best strategy for keeping up with change. Or, as Eric Schmidt, co-founder of Google puts it, you need to position your employees as thought leaders. Very few game changing ideas at Google come out of the “C-Suite.”

Likewise, the solution to improving performance in unstable settings, where the goal posts keep moving, is turning as many people as possible into passionate, courageous entrepreneurs with the autonomy to address challenges on the fly; it is not going back to the basics of centralized control.

In short, organizations are made up of people, and those people are more stressed, anxious, and emotionally fragile than at any previous point since industrial psychologists began studying it—and this is where emotional intelligence in particular comes in. Ignoring this reality is just plain dumb—and it applies to leaders as well! Getting the greatest value out of human capital is no longer about processes and procedures. Leveraging human capital today is about ensuring that the people in organizations have a sense of purpose, feel respected, appreciated and safe, can fail without fear, have excellent development opportunities, work together in highly effective teams, and have space to be the human beings that they are. That includes supporting vulnerability in employees as well. Why? Because without vulnerability (risk taking), there is no creativity. Without tolerance for failure, there is no innovation. Without creativity and innovation, organizations cannot survive and thrive in the current environment.

As Dr. Brown notes, the importance of these attributes have been understood for years. The challenge is that most of us simply haven’t had the courage to conquer the stigma and have a real conversation about vulnerability. For those who do, it is transformational.

Footnote

As noted in a previous article about the evolving model of leadership, no leader or person is binary. It is true that leaders are far more likely to be successful in contemporary organizations if they “rumble with vulnerability” on their way to courage, but that does not mean that other knowledge, skills, and abilities are no longer necessary or helpful. For example, operational expertise and financial acumen are valuable and will support a vulnerable, emotionally intelligent leader. Given a choice, following a best practice model for a given functional area or project is preferable to “winging it” or applying a poor practice. Effective, ROI based allocation of resources is preferable to “first come, first served” until the money is gone. The reality, however, is that as important as some of these skills are, they are simply “price of entry” attributes for leaders today. The value-add is found in the new elements of the evolving leadership model—and those are also generally the difference between success and failure for leaders today.

The Remaking of the Contemporary Leader

A significant, accelerating shift in the necessary knowledge, skills, and abilities (KSAs) for senior leadership that began about 15 years ago is now broadly complete and has resulted in a fundamental change in the necessary leadership profile for success in contemporary organizations. At a high level, the evolution has primarily been from “technical” skills and a top down decision making style related to process to “soft” skills related to leading people and organizations through high change environments and facilitating success in others. The shift is also broadly related to the traits and characteristics that support leaders themselves in complex, ambiguous, and even volatile operating contexts.

What drove the change?

There are many factors that have rendered much of the historical leadership model close to obsolete, but the primary drivers are:

The Pace of External Change

This includes competition, globalization, disruptive influences (automation, outsourcing), macroeconomics, the diminishing shelf life of ideas, technology, and market advantages, etc.

Demographic and Cultural Changes within Organizations

This includes the diversification of the workforce, influence of millenials, evolving beliefs and values, and changing employee needs among other factors.

Technology

Although technology is a component affecting both external and internal change, it is also a factor driving the evolution in leadership profiles in its own right because it has dramatically changed how people work together and communicate, business models, competition, training, data analysis, automation, and a host of other factors that compromise stability in organizations.

How do the old and new models compare?

The reality is that traditional leadership models are not only much less effective, they can actually be detrimental in contemporary organizations because top down decision making, a focus on process rather than people, and the products of cognitive vs. emotional intelligence can actually alienate employees, compromising performance, and in some cases, driving them out of the organization. Obviously, no leader falls 100% in either the old or new paradigm, but the demands of contemporary leadership are far more effectively met by the KSAs of the new model because it is less about the technical skills or task completion of the leader him or herself and more about how he or she facilitates success in others. It also does a much better job of recognizing and supporting the humanity in organizations, which supports human capital development and teamwork. And that is probably the single greatest competitive advantage an organization can have! A partial list of many of the discreet differences is below.

Old Leadership Model New Leadership Model
Egocentric Vulnerable/altruistic
Success through self Success through others
Expert Coach/partner
Isolated Accessible
Authoritarian Empowering
Talks Listens
Top down Distributed
Guards information Transparent
Directive Collaborative
Empirical Analytical
Objective Intuitive/Self-aware
Process expert People expert
Transactional Transformational
Risk averse Risk tolerant
Data driven Data generating
Technical skills Soft skills
Finance skills Financial literacy
Cognitive intelligence Emotional intelligence
Internal influence Internal and External influence
Process manager Change manager
Controls complexity Manages complexity
Results oriented Sustainability oriented
Planner Strategist
Avoids conflict Supports healthy conflict
Fears ambiguity Tolerant of ambiguity
Manager Teacher

In some cases, leaders benefit by leveraging elements of both the old and new paradigms. For example, if someone is fortunate enough to possess both high IQ and high EQ, that is certainly advantageous. Likewise, being results oriented and focused on sustainability is clearly value added. Leaders and leadership styles are not binary. However, the environments in which leaders have to perform today are so dramatically different than even 15 years ago, that they, and their organizations, are much better served by those who are broadly skewed to the new paradigm.

Unfortunately, while the literature in the field is slowly recognizing the profound changes required for successful, contemporary leadership, leadership training is, broadly speaking, still significantly behind the curve. Most leaders who benefit from the knowledge, skills, and abilities found in the new model are naturally disposed to the construct or have evolved over time through their own professional development efforts. They are also generally quite unique and reflect the leading edge of leadership practice. It is because most leaders do not, in fact, fit the new model, that so many are struggling today, turnover is high, and organizations find themselves ill prepared for contemporary challenges.

Surprisingly, one continuing barrier to the adoption of more progressive leadership behaviors across organizations is the culture that is still present in many environments. Culture is powerful and while a board of directors or an executive team might use the right language when discussing leadership needs, a minority of organizations and contexts are truly ready to support senior and executive level leaders who embrace vulnerability and are genuinely transparent or empowering or focused on sustainability over short term results. That will change over time, but for now, a core additional challenge for progressive leaders is overcoming the “old” thinking in their own organizations, boards, and industries!

A New Model for Higher Education Leadership—And Why Boards Have to Get Serious about Pursuing the Leaders They Need

As institutions of higher education (IHEs) downsize, merge, and close at an increasing rate, it is becoming clear that many executive level leaders are ill prepared to meet the challenges faced by colleges and universities today. This also partially explains both the sharply decreasing tenure of college presidents and the increasing failure rate of executive searches, i.e., institutions having to re-initiate searches not long after selecting a candidate.

So, what are some of the highest priority requirements for executive leaders in higher education today? The partial list below is a good place to start.

  • Strategic
  • Entrepreneurial
  • Innovative
  • Emotionally and culturally intelligent (and willing to embrace vulnerability)
  • Effective manager of: conflict, crisis and change
  • Has tolerance for: risk, ambiguity, complexity, and volatility
  • Possesses business and financial acumen
  • Understands organizational dynamics
  • Drives human capital development and teamwork
  • Respects the humanity within organizations
  • Understands and can influence the external environment
  • Can listen and learn

Note that the profile does not include items such as “expertise in shared governance” or “strong publishing record” or “content expert in engineering.” It is not that those items wouldn’t be nice-to-haves in a college president, COO, or provost. It is simply that the ways that higher education executives must bring value in today’s volatile, high-change, and highly competitive environment, are game-changing, strategic outcomes. Technical expertise and contributions in accreditation or curriculum or research are much better left to others in the organization whose efficacy and success are facilitated by executive leadership.

Ironically, it’s not that higher education boards don’t know what they need. Through my consulting work with boards, recruitment firms, and executive candidates, it is clear that IHEs have gotten much better at describing the leadership profile they need. Randomly select a dozen job postings for president or provost from the Chronicle of Higher Education and you will find words such as “innovative,” “visionary,” “dynamic,” “change manager,” “entrepreneurial,” “strategic,” etc. to describe the kinds of leaders that the institutions say they want. These postings will also typically say they want leaders with great people leadership and communication skills, financial acumen, and maybe even emotional and cultural intelligence.

The problem is that most IHEs are not very good at actually recruiting and hiring candidates with the leadership profiles they’ve created.

Why is this?

The challenge is partly because most universities and their boards are simply not culturally ready to hire a new kind of leader, and secondly, those same colleges and universities are generally poor environments in which to grow the leadership skills necessary for today’s challenges. As such, the internal pipelines in most IHEs are not producing many “new paradigm” candidates. Although there are increasing exceptions, the majority of executive level hiring decisions are still “safe,” status-quo affairs that don’t reflect the language of the job description nor the actual leadership needs of the institution.

One common and dysfunctional dynamic that compromises effective executive recruitment is that search committees and boards are often beholden to unwritten institutional requirements for executive candidates that force them away from the experience and skill sets that the institution actually needs. An example might be that despite what the job description says, the board won’t hire a provost without a high profile publishing record or won’t hire a president who has not raised a given sum of money. There is also frequently significant bias in colleges and universities based on core programs. For example, a school of psychology might only hire a chief executive who is a psychologist or a technical school might only hire a president who has a STEM background. The problem with that is not that psychologists and scientists can’t be good executives. The problem is that generally speaking, if an institution of higher education derives value from an executive based on her or his technical skills, then they are getting very limited value and it’s coming from the wrong place. A dental school, for example, is already full of people with technical and clinical expertise in dentistry. If the institution genuinely needs the experience and skill sets they’ve likely articulated, such as innovation, strategic thinking, business development, etc., then that should be the priority. If there happens to be an entrepreneurial strategist and change management expert who is also a dentist, then that could be a bonus, but what happens more often than not is the institution sacrifices the leadership profile they really need in favor of cultural, political, and historical biases that are vestiges of a previous, often anachronistic paradigm. As Peter Drucker famously noted decades ago, “Culture eats strategy for breakfast.” It also overwhelms executive searches and hiring decisions in higher education, which wouldn’t matter if the stakes weren’t so critically high.

Of course there was a time when higher education was a much more static, financially stable, and slow-change milieu in which the demands on leadership were also much less far-reaching—and the implications for getting a search right were far less significant as well. A couple of years ago, the Aspen Institute issued a report on the university president of the 21st century that identified 27 competencies of contemporary university chief executives. No one can claim 27 competencies, but the key take away is that the leadership profile of today’s higher education executive is dramatically, fundamentally different than it was even a generation ago. The reality is that there are candidates who are strategic, entrepreneurial, emotionally intelligent leaders, who build culture, empower people and effectively manage change. In fact, there are such leaders in higher education today, some of whom also have academic pedigrees, but they are “unicorns.” As such, if boards truly want to hire the executives their institutions need, they have to acknowledge and overcome the bias in the process and they have to be willing to look outside the pool of career academics, content experts, etc. Continuing with safe, dogmatic, culturally amenable hiring choices not only fails the search process, it ultimately fails the institution—and in many cases the right choice is an existential imperative.

While it is helpful for leaders to have at least a basic understanding of academic institutions and culture, in the current environment, most institutions would benefit from sacrificing “insider knowledge” in return for the knowledge, skills, and abilities extent in dynamic, strategic leaders who can move entire institutions. In short, institutions of higher education should recruit executives who will be “force multipliers” by leveraging the expertise and passion of the collective human capital of the organization, rather than through their own technical skills or task completion. The reality is that the pool of such leaders within higher education is far smaller than the number of institutions that need such leaders. However, if boards actually search for the leadership profile they say they need and are willing to evaluate candidates whose CVs were built largely outside of traditional higher education or narrow content disciplines, they stand a much better chance of getting the leaders they actually need.

A little courage wouldn’t hurt either…

Footnote:

I have worked with multiple recruiting firms, particularly those representing traditional public institutions, that, as a matter of protocol, actually filter out applicants who submit more than the minimum requested application materials. In other words, if the application only requires a CV, cover letter, and references, a candidate who tries to submit a leadership profile or innovation model, etc., is often told that the search firm cannot accept those materials because it “wouldn’t be fair” or wouldn’t be a “level playing field” for other candidates who don’t go beyond the minimum. As a result, in many cases, university search committees and boards are denied information that would be critical to the due diligence process and that, by definition, are more likely to come from more innovative, motivated, and less traditional candidates. I mention this because in a surprising number of searches, recruitment firms themselves contribute to the problem of perpetuating existing institutional bias in the search process, and to the ultimate outcome of hiring less qualified candidates that don’t actually fit the desired profile. I highly recommend that boards who are using search firms insist that those firms not only accept, but encourage that applicants provide information that supports identification of candidates who are more likely to meet the actual performance needs of the position. After all, once the hiring decision is made, the executive will not be afforded anything approximating a “level playing field.”

The Hidden Story Behind the College Admissions Bribery Scandal

Among the private universities implicated in the recent admissions bribery scandal, roughly one fifth of total enrollments at Wake Forrest, Georgetown, Yale, and Stanford are children from the “top 1%” of income earners in the country, while only half as many of their enrollments come from the bottom 40% of income earners! The hidden story is that regardless of how wealthy students gain admissions, exclusive higher education is one of the most elite propositions in American society. Bribery scandals aside, elite universities are the institutional epicenter of the structural preservation of privilege and wealth in the U.S.

Significantly, these four institutions also have combined tax-free endowments of $55 billion dollars! What this means is that despite access to astounding resources, these institutions still enroll far more “super wealthy” students than financially challenged ones.

And those uber wealthy admits are wedged into a group that is statistically extremely exclusive to begin with. Stanford, for example, admits less than 5% of freshman applicants on a yearly basis, while Yale admits approximately 7%. That exclusivity also happens to be one of the heaviest weighted variables in college rankings. In other words, the most exclusive, highest ranked institutions, are ranked so highly because of how many students they don’t serve!

While the idea of wealthy and powerful parents bribing their children into elite universities is a viscerally disturbing notion, the bigger, hidden reality is the system that ushers the nation’s most privileged applicants through the front door. Keep in mind that in these universities, the “legitimate” application process enrolls twice as many students from just the top 1% of the U.S. population as come from the bottom 40%! The numbers overall are small relative to the entire higher education population, but they are significant relative to who gets into the country’s most elite colleges.

Of course, this reality existed before the bribery scandal and it will continue after the scandal fades, but as Anthony Carnevale of the Georgetown Center on Education and the Workforce notes, the current admissions process is not a meritocracy, it’s an aristocracy, which seems to be one more example of what many see as a “rigged” system. And the problem is not limited to the Ivy League. As he notes in a recent report, “Today’s [public] higher education system is divided into two unequal tracks stratified by race and funding. White students are overrepresented at selective public colleges that are well-funded with high graduation rates, while Blacks and Latinos are funneled into overcrowded and underfunded open-access public colleges with low graduation rates.”

Although bribery gets the headlines, the status quo, every day admissions process may be the real story.

Why It’s Time to Revaluate “Profit” Status in Higher Education

Over the last 10 to 15 years, or so, almost any discussion about higher education policy has required that at some point, the legal profit status of the institution or institutions in question be divulged, followed by instinctive judgements about the institutions based on that tax status. Related to motives or mission or integrity, a non profit status is generally construed to be “good,” while a for-profit status is generally construed to be “bad.” That basic assumption is questionable on its face, but setting that aside, any judgments based on tax status are becoming more and more tenuous.

There was a time long, long ago, when institutions of higher education fell into two simple camps relative to tax status: For profit and not for profit—and that distinction generally meant something. The non-profits typically did all of the work associated with running a university themselves, their only business was higher education, and they rarely had significant “profits” at the end of a fiscal year. For-profits were generally family owned and operated, with strong local relationships, and a market driven need for quality outcomes and compliance. The primary difference was not related to profit per se, but rather to which one paid taxes and how ownership was structured.

The reality of how a growing number of higher education institutions currently operate financially has changed so dramatically, that including profit status as a means of evaluating, validating, or regulating those institutions is probably no longer defensible. To start with, the largest and most “profitable” institutions in higher education today operate with a not for profit tax status. Non-taxable, elite university endowments alone are worth hundreds of billions of dollars. Non-taxable college and university real estate and other assets may be worth half a trillion dollars. And that’s just the balance sheet.

Operationally, the lines have been blurred for at least a couple of decades with hundreds of IHEs now in partnerships with for-profit companies and a growing number of institutions actually functioning as venture capital investors in for-profit businesses.

Many “not for profit” institutions of higher education have built high margin, tax-free revenue businesses, the proceeds of which are used for everything from incentive compensation to private equity investments to subsidies for unprofitable parts of their operations. Of course, all organizations, regardless of profit status, must generate more revenue than expense over time, i.e., must be profitable, and those who are more successful financially are able to confer more benefit to their stakeholders, which is a positive outcome for both non-profit and for-profit enterprises. The current conundrum around profit status is not even related to profitability. It is related to what organizations do with profits and how they are regulated relative to their legal corporate structure.

Ironically, IHEs with an actual, legal for-profit tax status have never been less profitable and have been closing en masse. Those that do make profits, continue to pay federal and state taxes on those profits (as well as local sales taxes), while enduring additional regulatory burdens related solely to their tax status.

In what is probably the greatest irony of the for profit vs. not for profit debate, the most financially successful “not for profit” institutions today are making money using the same methods that “for profits” introduced into higher education decades ago—corporate partnerships, executive incentives, mass market programs, high-margin online programs, retail marketing, international and military students, spin-off businesses, equity investments, etc.—all while reducing costs with a for-profit-like expense model of contingent employees and outsourcing. Relatedly, the non-profit fallacy is at the center of a growing divide between haves and have-nots within traditional higher education itself. While some non-profit institutions have never been more profitable, with greater liquid assets, many others are facing existential financial stress–and hundreds will close over the next several years.

So, what does profit status really mean at this point? On the one hand, colleges and universities with a not for profit status have a significant financial competitive advantage over tax-paying, for-profit institutions. They also have a reputational advantage, but without most of the restrictions, both regulatory and financial, that apply to those with a for profit tax status. If Arizona State or Southern New Hampshire or Purdue, for example, can take their profits and turn them into venture capital or establish revenue sharing agreements with for-profit partners (or even acquire for-profit partners, then shed the tax burden), is there a meaningful difference between them and IHEs that operate with a for-profit tax status? Does it matter? Under what conditions would an institution with a legal not-for-profit corporate structure be perceived to have abused that status related to tax or regulatory obligations?

There is nothing wrong and a lot right with universities being entrepreneurial and with developing multiple revenue streams—in fact, it is necessary in today’s operating environment. On the other hand, not for profit tax status was never intended to be a competitive advantage in business. Moreover, it is a fair question to ask whether or not a non-profit university should have access to taxpayer funded Title IV financial aid, legislative appropriations, and other government support while having zero tax obligations on their endowments, property, and other profits.

One might argue that institutions with a not for profit corporate structure are more likely to be student-focused or operate with higher integrity than those with a for-profit status. However, if that non-profit moniker has simply become a tax shield, while everything else about the operations says “for profit,” then maybe the tax status is meaningless for judging institutional mission and integrity as well. Moreover, if a public university invests in a for-profit start up or acquires a business and it fails, whose money did they lose? If it succeeds, to whom do the profits belong? Private, not for profit institutions are a little more complicated, because they tend to receive much less taxpayer subsidy, but the richest universities by far also happen to be “non-profit” privates.

The rationale for non-profit status to begin with is based partly on the notion that an organization on which such a valuable benefit is conferred, has some obligation toward the public good. It’s not that “non-profits” can’t or shouldn’t be profitable. The idea is that if an organization is shielded from tax burdens and other regulatory obligations, that we should all be better off through a trade-off of sorts–the organization is afforded significant advantage, and in return, they make decisions that benefit society. That has been broadly true over most of the history of “traditional,” not-for-profit higher education, but if an institution with a tax free multi-billion dollar endowment is collecting taxpayer funded financial aid, then graduating students with unmanageable debt, while converting cash to venture capital, is that in the public good?

It would seem at this point that a better yardstick for validating the legitimacy of colleges and universities (and their taxpayer funding) would be achievement of agreed upon outcomes, rather than tax status. Those outcomes could be student diversity, student debt, retention, graduation and employment rates, social mobility after graduation or any number of potentially important objectives. That would also probably matter a lot more to students as well. Thinking way outside the box, imagine if an institution’s tax burden were based on achievement of those performance indicators rather than its status with the IRS!

The Growing Crisis of Confidence in U.S. Higher Education

I have written previously, here and here, about the ongoing contraction in higher education and the growing risk to what amounts to a majority of all private colleges in the U.S. While demographics explain the lion’s share of the decrease in enrollments (and thus revenue) over the last seven years, there is another, equally problematic phenomenon that higher education ignores at its own peril: the decreasing confidence that Americans in general have in the value of higher education. Recent surveys by Gallup found that this “crisis in confidence” is worsening, with less than half of American adults now having “a great deal” or “a lot of” confidence in higher education. While private institutions face a more grave existential crisis than do public institutions due to the differing financial models and political support, the crisis in confidence extends to all of higher education. In fact, many Americans no longer see college as the path to a better life, and in many cases, see it as an actual barrier to a better life due to crippling debt.

Attending college or university has always represented a major investment of time and money, but over the last 25 years, the decrease in public funding and the increase in tuition, has created a situation in which Americans are now, for the first time, broadly questioning the value proposition of a college degree. In just the last ten years, the cost of attending a four-year college in the U.S. has increased by nearly 30%. Until recently, students and their families were willing to borrow money to pay the increasing costs—to the tune of approximately $1.5 trillion dollars in outstanding student loan debt. However, it appears that the appetite for borrowing has waned as the value proposition of tens of thousands of dollars in debt (the U.S. average is about $30,000 per student, with about one in five borrowers owing over $100,000) becomes much less compelling. As a result, the average “discount rate” for tuition in private colleges now hovers around 50% with many institutions exceeding 60%. What this means is that in order to get students to enroll (and a decreasing number at that) institutions are actually charging only half of the published tuition rate. This is one of the primary reasons that not for profit private colleges are closing at a rate of about one every two weeks. The financial model is simply unsustainable.

If we evaluate the value of a college degree across the entire population, graduates are generally still better off with a four year degree than without, on average, earning up to $1 million dollars more over a lifetime than those with only a high school diploma. However, even with that increased earning power, the average graduate who does pay off his or her loans, takes over two decades to do so and defers everything from marriage to home ownership in the interim. The reality is that half of all borrowers today are making interest-only payments, and thus see zero progress toward paying their loans off. Moreover, research conducted by the University of South Carolina found that the student debt itself correlated with increased stress and related health problems, which contributes to the growing negative connotations associated with higher education.

The current oversupply of higher education in the face of continuing declines in enrollment is exacerbated by historically low unemployment and deep concerns about the value proposition of a university education in the first place. There is no question that the contraction will continue and that public institutions will downsize and merge and private (both for profit and not for profit) institutions will close. The question is how deep and sustained will the contraction be.

So, what should institutions of higher education (IHEs) do?

One bit of good news that recent Gallup research of graduates shows, is that there is an inverse relationship between the size of their student debt and the degree to which they believe their education was “worth it” (the higher the debt, the lower the satisfaction and vice versa). Why is that good news? Because the simplest and most effective thing colleges and universities can do to improve the perceived value proposition is to graduate students with lower debt. Relatedly, the research also determined that the issue is not just about money. It’s the value. Even high debt graduates are still likely to believe the cost (and debt) was worth it if they believe they had a high quality educational experience, which led to good employment. For students who don’t graduate at all, the outcome is usually quite grim, but that is another issue…

There are two critical lessons here for institutions of higher education. One is that student debt overall must come down if colleges and universities hope to overcome the increasingly negative views of higher education, and two, whatever debt students do incur must be “worth it” relative to the quality of their educational experience and the quality of their employment prospects upon graduation. The “between the lines” message here is that there is a very limited number of students overall for whom high cost on the front end with poor employment and income opportunities on the back end is viable. In other words, the notion of $30,000 or $50,000 to $100,000 or more in debt for a degree that leads to low pay or no gainful employment (social work, teaching, art history, photography, etc.) is very close to the end of its viability in higher education. To be clear, the career fields are not the problem per se. The problem is high cost degrees for low return employment—the ROI simply doesn’t work for students in these cases.

Obviously, many colleges and universities will survive because, in addition to addressing student debt, they will make a host of decisions about innovation, partnerships, alternative revenue streams, value proposition, expense models, etc. However, with the exception of a minority of institutions (think elite flagship state universities and highly selective private colleges) the survivors and thrivers in the remaining 80% or so of IHEs, will make it because they change the way they operate. Even then, supply will shrink, but the institutions that survive will be much more innovative, customer-centric, and financially viable–and students will have the confidence in the return on investment to enroll.

The Innovation Crisis in Higher Education

One can use a lot of words to describe the typical higher education culture, but “entrepreneurial” is usually not one of them. To the contrary, although there are a few exceptions, higher education cultures are more likely to be defined by a powerful inertia in favor of the status quo. That reality is not just unfavorable for innovation, it is actually at the core of the existential crisis facing much of higher education today.

The process that does exist to facilitate change in traditional colleges and universities generally favors extensive deliberation over timely action and distributed authority for decision-making. It also is driven by institutional needs rather than market needs. That process works really well when the external pace of change and/or need for change is equally slow and incremental. The central problem for higher education today is that the external pace of change is disorientingly fast, exacerbated by the fact that the market need is for transformational change. The current rate of college and university closures is painful evidence of the mismatch between traditional higher education culture on one hand and external and market demands on the other hand.

Although the world of higher education is fundamentally different in some ways than much of the “private sector,” with requirements for accreditation, governance, and complex financial models being prime examples, much of what mitigates against innovation, even though deeply structural, is nonetheless by choice. In other words, it doesn’t have to be the way it is.

The number one facilitator of nimble, speed to market activity in organizations is culture. Organizations that function with continuity, lack of politics, appetite for risk, and teamwork will be more entrepreneurial, more agile, and more successful over time because those things reflect the value of human capital and cannot be commoditized. As Gary Vaynerchuk of VaynerMedia notes, technology and skills and products offer a painfully short competitive shelf life, but the emotional ability to interact with others and work collaboratively toward shared goals cannot be coopted or copied by any competitor and it is renewable. Although it’s harder to create, once you have it, human capital empowered by culture is the number one determinant of success, in the tech world, and anywhere else. In the higher education ecosystem it may be an even more powerful asset and competitive advantage because it is so rare.

So, how can institutions of higher education operationalize innovation? A place to start would be a model that recognizes the massive human capital that already exists in institutions as the source of innovation rather than the keepers of tradition and status quo. This is as much or more a cultural shift than an operational one, but it can start small, with individuals, and grow to eventually be institutional in nature. No one would describe most college environments as having appetite for risk, operational continuity, or even much sustainable collaboration, let alone as “apolitical.” In fact, as the scarcity model pervades higher education, institutions are often becoming less collaborative. Having said that, even with the cultural challenges inherent in much of higher education, there is a surplus of ideas and energy, and a powerful, if unrecognized and untapped army of potential entrepreneurs waiting to be empowered. Some simple steps include:

  • Ensuring that, at the enterprise level, the institution has identified a list of high risk-high reward initiatives/strategies and implements at least one or two each year.
  • Doing a similar exercise at the school/division/department level and creating an “experimental” channel for new initiatives that is outside the normal evaluation/approval process.
  • Add an item for entrepreneurialism or innovation in every individual’s performance evaluation.
  • Create interdisciplinary teams to work on high priority challenges and give the teams the authority to choose the desired solution.
  • Incentivize innovative problem solving with shared rewards generated by successful solutions.
  • Create innovation or entrepreneur grants that do not require a quantified return on investment.
  • Volunteer with regulators/accreditors for every advertised pilot project and take a leadership role in suggesting others.
  • Invite industry and/or the community to be a ground level partner in all material initiatives.
  • Identify the most entrenched, inviolable, “sacred” constructs in the institutional culture and history. Put that list next to the greatest challenges faced by the institution. Which sacred cows exacerbate which challenges or present a barrier to success? Determine which of those the institution will abandon in favor of solving a critical problem.

The strategies above reflect a very small list of potential initiatives, but when implemented, they support entrepreneurialism, result in innovative outcomes, and support a culture that becomes self-sustaining. Obviously, institutions that are led by people who believe in the value of human capital, risk-taking, collaboration, teams, and empowerment are going to be better positioned to address the “crisis of innovation” that is compromising much of higher education than institutions whose leadership and core culture value tradition and status quo over innovation. But even in those institutions, support for incremental experimentation can lead to innovation and culture change. Higher Education is already experiencing the greatest contraction since WWII and the institutions that survive and thrive in the current environment will simply be those that adapt through innovation and an openness to the “new” in every way.

It’s Time to Think Differently About Competition

As managers and leaders we’ve been taught that our competitors are our “enemies.” While there may be good reason to protect a bon-a-fide competitive advantage at a given point in time, the historical notion that our competitors are enemies to be avoided and worse, even hated, also has significant costs. It’s probably time to re-evaluate the old thinking. Even more problematic, we have even been socialized to see others in our own organizations as competitors—vying for limited resources, promotions, incentives, etc. While friendly competition can certainly be a motivator in some cases, that is only viable over time in organizations if the competition does not have zero sum winners and losers. Some of the least healthy and most dysfunctional organizations I’ve ever seen are those whose cultures are based on winner take all competition. Those cultures are deadly for collaboration, collegiality, and teamwork.

When markets were more stable and even static over time; when operating environments had less regulatory risk; and certainly when demand outstripped supply (as was the case for decades in higher education), circling the wagons and operating as if every asset, idea, technology or product/service was “proprietary” might have made more sense. In the world we operate in today, however, which is not only volatile, uncertain, complex, and ambiguous (VUCA), but in which most organizations are forced to operate with limited capital and increasing overhead (caused by regulatory requirements, constantly changing technology, perpetual upgrades to products and services, increasingly expensive marketing, etc.), while also experiencing downward pressure on pricing, there are compelling reasons to see one’s former enemies as potential partners. Within organizations, the current environment requires a kind of collaboration that actually supports self-sacrifice and shared victories. Outside of or between organizations, the current environment supports formally unheard of partnership between competing entities.

To be clear, leaders must be thoughtful and purposeful when engaging “rivals” in partnership, but the reality is that across industries, most players experience the same kinds of challenges and risks, and thus similar potential benefits from effectively meeting those challenges and/or mitigating risks.

What are some examples where working with competitors makes sense?

In highly regulated industries, working together to improve overall compliance protects everyone while also improving industry-wide reputation. While there might be some temporary value in seeing a competitor crash and burn with a compliance problem, the collateral damage to the industry at large can be devastating. Two recent examples are higher education (for profit and not for profit) and cyber security breaches across multiple industries.

Another example, ironically, can be found in hyper-competitive contexts. For instance, many retailers now partner with Amazon, which previously was considered a bitter enemy. Such partnerships have allowed companies that are experts in a given retail sector to partner with the world’s expert in eCommerce and logistics to dramatically expand their customer markets. Similarly, airlines, which have historically also been bitter rivals, have partnered aggressively to sell seats on each others airplanes, so that they can offer more choices and bigger networks to their own customers. Of course these partnerships come with compromises, but they also solve what otherwise might be intractable problems and/or open what would otherwise be limited or closed markets.

One “industry” that is currently in serious decline in terms of customers (enrollments) and revenue is higher education. It is also an industry that has historically been profoundly insulated and generally closed to partnership with competitors. Not surprisingly, the vast majority of institutions of higher education share common problems that would benefit from shared efforts at resolution. Everything from student debt to retention and graduation rates, to the currently unsustainable financial models, is ripe for collaboration. The traditional higher education model, however, has been for each and every institution to build and maintain an entire, free-standing infrastructure, that must be wholly supported with that institution’s resources. It is not uncommon to see colleges or universities a few miles or even blocks apart that must each sustain separate physical plants, curricula, faculty, staff, and administration, technology, student services, housing, libraries, and every other element of what makes the institution an institution. The model is unsustainable and is one of the reasons that IHEs are shrinking and closing in record numbers. The future viability of the majority of higher education institutions will likely require some level of partnership with “competitors.”

The health care industry is similar, in which competing hospital systems each build and sustain separate, very expensive, free-standing clinical infrastructures. So far, the answer has not been to partner with competitors in ways that make sense, but to “vertically integrate” their own health care systems so that they wring every penny out of every billable event and keep those revenues within their own system via internal referrals. It is highly unlikely that the current health care model will continue unchanged either. In fact, as with higher education, partnering with “competitors” will likely actually become a competitive advantage as institutions work together in ways that improve customer/patient/student outcomes at lower cost and risk to the providers. Just imagine if one institution could offer desirable, shared facilities to students or patients at a fraction of the cost of building and maintaining those facilities separately? Or if two different universities could both improve student retention with shared mental health counseling resources at significantly less cost to both? It’s not unreasonable to even think of combining core assets and functions such as curriculum and instruction or financial aid in IHEs or imaging labs and urgent care among health care competitors.

As unlikely as it sounds to partner directly with what have traditionally been considered competitors, it may actually be a key strategy for surviving and thriving in a VUCA world.