Free Markets and Competition:
Taking Public Universities into the 21st Century

John V. Lombardi
University of Florida

Published in Impact: The Quarterly Magazine of Florida Policy & Culture  
(3:1 Summer 1997, 15-17)

We in universities don't like to think of ourselves as businesses. We like to believe we live on a higher level, that we concern ourselves only with the qualities of the mind and with the discoveries of the human spirit, and that our work is a calling and not an enterprise. We keep invisible the unglamorous and complicated details of our academic institutions, we speak of resources rather than money, and we focus on values rather than costs. This is as it should be, for the university is indeed a place of the mind and the spirit. It exists to create and teach the skills of knowledge, information, and understanding. Our students, faculty, and staff -- as well as our alumni and friends and our donors and public supporters -- see in us a reflection of their own values.

We try to meet all of those expectations and, for the last half century, we have succeeded. We educate more than half of all high school graduates, contribute the basic research and scientific development that drive the world economy, engage the intense debate and research on public issues of policy and morality, and run an engine of discovery and innovation that is admired and imitated world wide. We do this, not with magic, but with money invested in the physical and human capital of America's colleges and universities. We have succeeded because others saw in us a good business investment.

This growth in students, budgets, and research accomplishments lulled us into a false sense of complacency. We believed that American universities stood above the fray, immune from the economic realities of the world market. We imagined no significant challenges from competitors, no declines in public support, and no criticism from our beneficiaries. When challenged, we dismissed our critics as being confused, misinformed, or malicious. In gatherings of faculty, administrators, and supporters we comforted each other by saying that our critics simply didn't get it.

In this we should hear an echo from years ago from the other great American enterprises like steel, automobiles, and electronic appliances. Each enterprise thought it controlled its world but failed to understand the challenges of its competitors, and each either disappeared as a competitive business or had to regroup to survive.

American universities are big business -- a business of information, knowledge, and understanding. We deliver value through teaching, research, and a host of related products (service, agricultural extension, clinical medicine, and technology). We sell products to many customers, and we spend our income on people, facilities, and services. As high-technology businesses, universities support the research and development that create their future products. Universities depend on a long-term investment in the quality and productivity of their faculty.

None of this is revolutionary thinking or particularly controversial, but for many of us it is uncomfortable. We do not like to think this way. We could avoid it when the market for our products appeared endless and the competition for dollars gentle. We no longer have this luxury.

Show us the Money!

Today, universities compete bitterly for dollars. Other universities, public schools, social services, and health-care providers compete for the dollars that once belonged to us alone. University education, once the province of the paying elite, now belongs to everyone as the requirement for a chance at the good life. Public and private agencies endlessly regulate the university through accreditation, university systems, higher-education commissions, and citizen boards.

We who live and breathe the university often feel battered and buffeted by these constraints on our ability to do what we know how to do. Frustrated by our ineffectiveness in stemming the tide of criticism and over-regulation, we complain about the three R's (Rules, Regulations, and Requirements) and write lengthy, ineffective, and elegant strategic plans, mission statements, goals and objectives, and study commission reports.

We have no simple answers, for this is not a simple world nor are universities simple places. We err only in that we begin with theory. We debate our worth, examine our values, and define our ethos. While we do this, large research universities like Florida manage billion-dollar budgets. We accumulate and spend our money. Our worth, values, and ethos already exist. We can debate them in eloquent prose, but we define them by the way we spend our money.

Universities struggle to explain to students, parents, legislators, donors, citizens as well as faculty and staff how they spend the money. We do it poorly for, although it's not true, many people think universities spend money inefficiently. For public universities embedded in onerous regulatory systems, these confused explanations about what we do with the dollars invite others to regulate our expenditures without concern for university quality and productivity. As the competition for higher-education dollars grows ever more intense, we must end this casual attitude toward money. Everyone agrees we must be effective and productive. We get there only by following the money. And following the money is the first element of successful competition.

If we understand our money, we know our values. All university activities depend ultimately on the expenditure of money. If we believe in the value of poetry, we will spend money on poets, poetry books, and poetry classes. If we spend no money on poetry, then we do not value poetry. If we believe in the value of science, we will hire faculty, purchase equipment, and buy buildings. If we know how the university spends its money, we know its values; if we want to change our values, we will change how we spend our money.

Public universities live in over-regulated environments and earn income from many different sources, each with its own requirements and accounting rules. Our official accounts rarely help us understand what we do with our money. Universities do fund accounting. Money comes into a fund for pencils. We buy pencils. At the end of the year, the auditors check to see if we spent the fund's money on pencils. If we did, we get a star for being good stewards. No one asks if we needed the pencils.

At Florida, we follow the money by being explicit. We believe that a university needs a clear sense of what it does and what it expects to measure. Our university does teaching and research, and we assign all academic income and expenses to either teaching or research. In doing this, we make distinctions that we could otherwise ignore. What do we do about clinical medicine, agricultural extension, or intercollegiate sports? These affiliated and supportive activities of the colleges and university must support themselves and contribute a surplus to the academic enterprise. Are these distinctions happily accepted by all of our faculty colleagues? Not necessarily, but the conversation about their classification helps focus our attention on what our dollars buy and what we expect from each other.

Quality Is Job One

Productivity from the university's point of view resides in the aggregation of faculty we call a college (Liberal Arts and Sciences, Engineering, Medicine, Agriculture, Business, or Journalism). We hold colleges accountable for the university's teaching and research. We measure the university's success not by how well we redistribute the surpluses and deficits among the various colleges, but by how well the colleges create new sources of revenue and improve their own productivity with existing dollars.

Within this model, quality drives our evaluation of productivity. Over time, the price of higher education depends on quality. Success for a 21st-century university will depend on delivering high quality at the lowest cost and on reinvesting in faculty, staff, students, equipment, library, computing, and the like. Reinvestment results from surplus on current operations. If we generate only the revenue needed to stay open today, we consume the capital investment of a previous generation. As our faculty retire and our equipment ages, we will not have the money to replace them at the top of the market. The more productive the university, the more it can reinvest in quality. This is the principal driver of the dollar-based, productivity model for university budgeting currently operating at the University of Florida.

Costs are important. Universities find the marketplace resistant to endless price increases. Most private, high-tuition universities already engage in tuition discounting. Public universities with low tuition can enter the marketplace and compete on tuition, for the state cannot subsidize middle-class students forever without tax increases. The consuming public wants inexpensive, high-quality education. As the pricing of public and private, large and small institutions tends to converge, consumers will seek information on quality. Universities that cannot sustain quality because they do not manage their costs will lose this competition.

We will need to compete in what some call distance education. This is really technology-based education, whether from a distance or not. Technology makes possible alternative delivery of information, knowledge, and understanding. Technology reconfigures educational costs. Name-brand education can appear in any geographic area at competitive costs. Bureaucratic responses to this opportunity can prevent public universities from competing in parts of this market. In Florida, an effort to maintain obsolete geographic boundaries opens our market to out-of-state institutions that ignore our restrictions and use their brand names to take business away from all of us. In response, Florida institutions seek markets outside of the state. Prevented by regulators from delivering the products developed at state expense to populations in Florida, these universities will export their products to customers living in more competitive, out-of-state environments.

Anti-competitive systems and controlling bureaucracies will struggle to contain the pressures brought by scarce resources and dynamic marketplaces. When challenged, all bureaucracies respond with more restrictions. They can stifle the creativity of their client institutions and leave the market open for other more aggressive and entrepreneurial organizations. To remain competitive, public universities must reduce their internal bureaucracies and buffer the impact of external constraints. A creative faculty and staff can overcome the constraints of bad public policy.

Universities live on the quality of their people. Those institutions that reward quality and productivity will keep the best faculty and staff and will compete successfully. Those prevented from rewarding quality and productivity will decline. Public universities must overcome the regulations that limit rewards for productivity.

In the competition for private dollars, fundraising, already a fine art, becomes even more important. Universities offering donors performance-based, investment opportunities will succeed better than those that appeal primarily to institutional loyalty. Universities whose states have had the wisdom of Florida's legislature in creating matching programs for private gifts to public universities will compete best.

While private universities encountered many of these issues earlier than public universities, no one escapes these changes. Public policy into the 21st century must encourage university competition through deregulation and the opportunity to fail as well as succeed, for the price of innovation and creativity is the occasional failure. The benefit of deregulation is innovation and accountability for performance. Public policy that promotes dollar-based performance budgeting and encourages competition delivers the best educational opportunities to Florida's citizens and guarantees the highest-quality, lowest-cost universities into the next century.

June 1997

[Slighted edited version published in Impact, (3:1, Summer 1997, 15-17.)]

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