SEMO business model is flawed

Complicating budget woes at Southeast Missouri State University is a high fixed-cost operating strategy that magnifies economic hardship when revenue declines.

For the last 10 years the university has been aggressively adding fixed facilities while simultaneously moving more courses online. A recommendation by a consultant to pursue increased enrollment coincided with Gov. Mel Carnahan's legislative initiative to segment higher education into open-door, moderately selective, selective and highly selective. The moderately selective segment chosen by Southeast established minimum admission standards while still allowing the university to admit up to 20 percent as "special admissions" exempt from the standard.

Because the 20 percent ceiling was thought to be inconsistent with higher enrollment, Southeast began admitting more students who did not meet the minimum standard. Greater access for students at risk was characterized as a socially desirable goal not unlike subprime lending, but it was also believed that the strategy would deflect growing calls for a community college option in Cape Girardeau.

A public spat between Southeast and Three Rivers Community College in Poplar Bluff, Mo., culminated in Southeast entering the community college business, a circumstance that enhanced the reputation of the Three Rivers while suggesting that Southeast's peer group is not other four-year public universities in Missouri but a bevy of community colleges in Southeast Missouri and Southern Illinois.

Financial analysts would characterize Southeast's market positioning as stuck in the middle. Sears is a stuck-in-the-middle company that has had its market niche eroded by Walmart, Costco, Lowe's and other discounters but was unable to match the perceived quality of Dillard's, Macy's and numerous specialty stores. Southeast was once well-positioned to exploit a strategy focused on first-generation college attendees from Southeast Missouri and the greater St. Louis area. However, it has seen its market niche eroded by community colleges and institutions of perceived higher academic quality.

There will be continued low-end competition in the local market, and Southeast is powerless to reverse the trend. However, the university can develop a sustainable long-term business model to cope with the changing higher education environment. Going forward, Southeast must make the decision to move from the middle and commit to either a down-market or up-market strategy.

The down-market approach would entail jettisoning the moderately selective label in favor of an open-door admission policy much like Harris-Stowe State University did three years ago. High-cost graduate programs and many academically demanding majors would be eliminated. The college would focus on offering associate degrees, vocationally oriented bachelor programs and online instruction. This would require unbundling costs and the removal of numerous cross-subsidies. An online student in Texas would not pay for Division I athletics or an aquatic center on the Southeast campus. Online instruction is a generic commodity that will be increasingly discounted not unlike generic peanut butter or toilet paper.

There are several problems with the down-market strategy. The current Southeast faculty is not well-matched to the strategy, nor does it solve the high fixed-cost problem. Given demographic trends in the region there are probably not enough down-market students in the appropriate age cohort. The 2006-2016 projected decline in Missouri high school graduates is smaller than many other Midwestern states, but the decrease will be significantly larger in all but three or four of the 24 counties the Southeast service area comprises. By definition, students do not travel long distances or live in dorms on the campus of down-market institutions. They attend the local "community" college. Unlike Harris-Stowe, positioned in an urban market, Southeast must give students a reason to travel longer distance.

Rather than raise tuition, the down-market business model would entail tuition cuts commensurate with discounters entering the market. Along with lower standards comes lower retention and higher costs associated with remedial education and compliance with government aid programs. More local parents with college degrees would likely send their children to universities with superior academic reputations outside the region. Some alumni might withdraw their support, since a down-market strategy, like currency devaluation, diminishes the market value of their higher education investment.

Alternatively, the up-market strategy would rededicate the university to higher academic standards. Moderately selective rules would be enforced with the prospect of becoming selective. Students unable to meet the standard could attend an independent community college in Cape Girardeau. Budget cuts would be based on the quality of programs as well as the number of graduates. Administrators would be hired and retained based partly on their skill as external fundraisers who supplement academic programs. Fixed facilities not producing a net benefit to students would be sold, leased or closed and the proceeds used to fund academic scholarships in high-quality/high-demand majors. Enrollment might decline in the short-run, but it would result in a more viable long-term model that attracts students from a broader geographic area and positions the university for the imminent decrease in the number of Missouri high school graduates.

Students at risk and anyone else should have the opportunity to improve themselves by attending a local, low-cost, less academically demanding community college. It is not elitist to think that higher-achieving kids in the region deserve the same opportunity to earn a quality college education as students living in Springfield, St. Louis or Kansas City. Indeed, many of us who grew up in Southeast Missouri believe that the true elitists are those who think otherwise.

Mike Devaney is a professor of finance at Southeast Missouri State University.