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Report Brief

Diversifying Campus Revenue Streams: Opportunities and Risks

PURPOSE

Constrained government funding imperils the preservation of the academic status quo. Lowered funding from traditional sources, increased expectations, and the shifting competitive landscape, where new providers and technologies threaten long-standing assumptions about institutions' assured market positions, are forcing institutions to seek additional revenue sources. This report considers how colleges and universities are diversifying their revenue streams.

KEY POINTS FROM THE REPORT

• There is no limit to what could be spent by institutions in pursuit of their goals, and therefore institutions will always raise and spend all the money they can.
• Institutions are diversifying their revenue streams in many ways, including:
  • Instructional initiatives. Due to threats to the financial resilience of core programming, institutions are changing the grounds on which they make academic decisions, such as new providers, new markets, and new technologies. These include online programming and niche-oriented non-degree programming.
  • Research and analysis initiatives. Some institutions are repackaging their research and analysis capabilities to generate revenue, including business incubators, technology-transfer offices, research and technology centers and parks, small business development centers, e-commerce initiatives, and research collaborations with private industry and the government.
  • Pricing initiatives. Tuition and fees have risen significantly in recent years, and have become increasingly differentiated. Institutions are experimenting with finer distinctions in pricing and user fees, beyond state residency and field of enrollment.
  • Reforms in financial decision making and management. Financial reforms can help improve revenue flow, including venture capital investments and participation in arbitrage and options markets.
  • Human resources initiatives. Human resources are being employed in new ways, including compensation initiatives for entrepreneurship and retirement/rehiring initiatives for faculty.
  • Franchising, licensing, sponsorship, and partnering arrangements with third parties. Such endeavors include logo-bearing clothing, tours and camps, and event sponsorship.
  • Initiatives in auxiliary enterprises, facilities, and real estate. Revenues from auxiliary units do not always exceed costs. Some auxiliary enterprises can pay off, however, including on-campus debit cards, facility rentals, and alumni services.
  • Development office initiatives. Institutions are diversifying their development efforts in response to the challenge of building a self-sustaining development effort. Appeals to donors abroad are one example of such efforts.

RECOMMENDATIONS FOR PRACTICE

• The ultimate goal of any revenue-diversification effort should be the generation of new net returns, not simply the generation of new revenue.
• In order for fundamental changes to occur, the impulse to do business in different ways must be communicated and institutionalized at all levels of the organization.
• Any decisions about pursuing new revenues ultimately must deal with the question of why new revenues are being sought.
• Producing new institutional revenues that are fully offset or dwarfed by new, associated costs is acceptable only if there are notable nonfinancial returns and if the new net costs are viewed as acceptable from an individual, institutional, or public perspective.
• Pursuit of new revenues should be with the understanding that new revenue-oriented initiatives will be undertaken only after rigorous consideration of the associated costs, including the opportunity costs of forgoing other initiatives.
• New initiatives need to be evaluated rigorously to ascertain mission appropriateness, cultural fit, substantive quality, short- and long-term financial prospects, risk tolerance for all parties involved, and organizational sustainability.
• Effective decision making on prospective initiatives should be institution-specific and should consider factors not easily monetized.
• Revenue-seeking initiatives should be congruent with the existing or desired institutional mission and culture.
• Launching new revenue-generating enterprises requires entrepreneurial spirit and cultural and organizational conditions necessary to fuel and support that spirit.
• Some revenue-seeking choices affect an institution only at its periphery (e.g. renting athletic facilities out for tournaments), and other choices have more profound impact (e.g. the effect of offering degrees online on the "brand" identity of the institution).
• Consideration of two potential dangers is key:
  • The risk that public authorities may come to believe that higher education can obtain enough new revenue to take care of itself without additional substantial societal investment.
  • Unreflective movement toward diversified revenue streams can threaten core institutional identities and missions.
• Institutions must do what business does - change as revenue possibilities change. This leads to the question of how institutions can become adaptable while remaining true to their traditions of self-management and intellectual achievement.

REFERENCE

Hearn, J. C. (2003). Diversifying campus revenue streams: Opportunities and risks. Washington, DC: American Council on Education Center for Policy Analysis.

Submitted by Leah Ewing Ross, May 2004. This is a report summary and excerpts are quoted directly from the text.