More colleges and universities outsource services to for-profit companies

MEDFORD, Mass. — The Tufts University campus was a quiet place in the fall, where students were scolded to stay in their dorms, checked frequently for Covid-19 and — if they tested positive — quarantined in modular housing set up on the tennis courts.

As with much in higher education this academic year, the real activity was online, where the university was busy launching a new virtual master’s degree in data science and an online program in computer science for people who already have bachelor’s degrees.

Aimed at consumers needing to find new jobs or preparing for graduate school, the offerings seemed well timed to attract students.

What students won’t see in the promotional materials or when they register, however, is that the programs are being managed by a private, for-profit company called Noodle that is being paid $12,000 to $22,000 per month, per program, plus $88 per credit hour, per student, according to a list of fees disclosed by Noodle. 

Public and nonprofit colleges and universities have long outsourced such things as bookstores and dining and custodial services. Now they’re paying tens of billions of dollars a year to for-profit corporations to create and operate online courses, recruit and enroll students, advise and tutor those students once they start school, oversee research, manage information technology and utilities and build or manage dorms, classrooms, labs, parking and student unions that were previously all handled in house.

Outsourcing has speeded up during the pandemic. Some 300 new deals are believed to have been reached between universities and for-profit online program managers, a 79 percent increase over last year. 

Some of these functions are outside the institutions’ educational missions, advocates of such partnerships point out, though what’s new is that “more and more are cutting closer to the academic core,” said Dennis Gephardt, vice president and senior credit officer on the higher education and not-for-profit team at the Moody’s bond-rating agency. 

Universities and colleges say outsourcing also saves them money and makes them more nimble and efficient. Under the Noodle deal, for example, a Tufts spokesman said, the university retains control of admissions and content and hires instructors while Noodle speeds up the pace at which new programs can be introduced. Tufts is charging $1,697 per credit hour for most of the courses in the programs it just started, not including mandatory fees.    

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“The benefit to institutions seems fairly clear,” said Clare McCann, deputy director for federal higher education policy at the think tank New America. “It means someone else will handle the difficult process of getting these programs up and running and of growing these programs.”

The benefits to students, she added, speaking generally about such deals, “are a lot less clear. Many students don’t realize their programs have been outsourced to a for-profit company they have probably never heard of.” In many cases, she said, “they’re getting an education that’s largely created by a whole other entity that may or may not have good outcomes.”

Universities and colleges now pay $4 billion a year to online program managers such as Noodle; that figure is expected to increase to $10 billion by 2025, according to the education market-research firm HolonIQ. They spend $16 billion annually on educational technology, projected to rise to $20 billion by 2024, BMO Capital Markets estimates. And they channel at least an estimated $15 billion to companies in the enrollment management sector for marketing, recruiting and enrolling students, a senior industry insider says. 

“What we’re seeing is a real blurring of the lines between nonprofit and for-profit higher education,” said Michelle Dimino, education senior policy advisor at the think tank Third Way.

Even as the pandemic has accelerated the pace of outsourcing, it has exposed problems with these kinds of arrangements with for-profit partners beholden to shareholders, venture capital backers or lenders. Some seem not to be saving as much money as promised.

Colleges and universities have increasingly outsourced housing, for example, in so-called public-private partnerships, or P3s, under which developers such as Corvias and Capstone Development Partners build dorms in exchange for future income from students’ payments. 

That became a problem this fall when Capstone wouldn’t let Maryland public university students out of their leases or give them refunds — which their classmates who lived in university-owned dorms received – after the campuses went virtual because of the pandemic. The universities had no say in the matter, they told angry students and their parents.   

The dispute was finally settled in late December, when students in the privately managed residence halls were freed from their leases or promised credit toward future housing. Part of the cost will end up being borne by the universities. 

Related: How higher education’s own choices left it vulnerable to the pandemic crisis

In Georgia, Corvias warned the University System of Georgia Board of Regents not to limit dorm capacity as part of social-distancing rules to slow the spread of Covid, which could have cut into the company’s revenue. The board’s staff advised that, under the system’s contract with Corvias, the regents did not have the unilateral right to cut into the company’s business, although a big drop-off in demand ended up doing that anyway.   

The cases “raise serious questions about the nature of these partnerships and the private sector influences” on higher education, U.S. Sen. Elizabeth Warren and U.S. Rep. Rashida Tlaib wrote in a letter to Corvias.

Employees of contractors that staff and run dining halls and custodial services at institutions including Harvard University and the University of Pennsylvania, meanwhile, were vulnerable to layoffs when those schools went remote in the spring, even while other campus workers were protected. After criticism from students and unions, Harvard and Penn responded by agreeing to pay contract workers through the end of the spring, though other universities with contract employees did not.

Such cases suggest a broader human cost to outsourcing services, said William Tierney, founding director and professor emeritus of the Pullias Center for Higher Education at the University of Southern California. 

“A small liberal arts college in upstate New York employs a lot of people, and when we outsource that to some call bank in New Jersey and let go of 10 or 20 people, that’s 10 or 20 fewer people who live in that community,” said Tierney, author of “Get Real: 49 Challenges Confronting Higher Education.”

Outsourcing has only speeded up during the pandemic. HolonIQ projects some 300 new partnerships this year between universities and online program managers, or OPMs, for instance, a 79 percent increase over last year. 

The dominant OPM player is 2U, which struck its first deals in 2009 with USC to provide master’s degree programs in social work and education under the USC brand. Under this model, 2U built and managed the programs in exchange for 60 percent of the revenue. The university has since paid at least $166 million to 2U, the Los Angeles Times reports.

Related: As the world goes virtual, big education technology players tighten their grip

Now valued at nearly $3 billion, 2U has grown to run more than 475 programs, including boot camps and certificate programs, for more than 75 university partners. Its revenues grew 44 percent in the first quarter of 2020 and 35 percent in the second quarter, and the company’s stock price is up from $17 to $40 since mid-March.  

“The profound financial impacts of the pandemic have only made the value of our upfront investment and bundle of services more clear,” 2U’s CEO, Christopher Paucek, told investors in the summer.

There are now an estimated 200 OPM companies, which charge commissions as high as 80 percent. They closed 51 new deals with universities and colleges in just the first half of 2020, according to HolonIQ. 

More than half of OPM partnerships follow 2U’s commission model, according to an analysis of financial documents obtained by the think tank The Century Foundation from 79 public universities; the rest, including Noodle, have moved to a system of set fees.

Under the 2U system, the company covers startup and operating costs of from $5 million to $10 million per program, BMO Capital Markets reports, based on a 2U investor presentation. After expenses, 2U’s university partners get, on average, $6 million to $7 million in profit per year and 2U gets $5 million to $6 million.

“A lot of institutions see it as a percentage of something is better than nothing,” McCann said. But “institutions need to be setting up programs that are financially sustainable and, where the revenue share is as high as we’ve seen it, that’s not necessarily going to be sustainable in the long run.”

“What’s the university about when we outsource everything?”

William Tierney, founding director and professor emeritus, Pullias Center for Higher Education, University of Southern California

In addition to being expensive, many OPM contracts are long and hard to get out of, with automatic renewals and noncompete clauses, The Century Foundation found in its analysis. More than half cover terms of five years or longer.

All of this leaves universities with little flexibility if their financial situations worsen.

“We are seeing schools that made these sorts of deals in the spring and could be locked in for several years to come, even as their funding circumstances remain in flux,” Dimino said.

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In a third of cases, the OPM, not the university faculty, provides the instruction, even though it carries the university’s name. 

Now universities and colleges are making similar deals with companies to help them provide their own computer coding and other IT-related “boot camps” — an increasingly popular market BMO estimates to be worth $309 million a year.

Columbia University and the University of Pennsylvania in July announced that they would offer online coding boot camps to high school students through Trilogy Education, a company acquired by 2U in 2019. Graduates will get certificates they can add to their resumes or college applications. (The Hechinger Report, which produced this story, is an independent unit of Teachers College, Columbia University.)

“Many students don’t realize their programs have been outsourced to a for-profit company they have probably never heard of.”

Clare McCann, deputy director for federal higher education policy, New America

There are dangers with this, too, if the quality of the programs falls short, warns Tyton Partners, an education-focused investment banking and strategy consulting firm. “Institutions have well-established brands to protect and the association of their names with training that falls outside of existing accreditation structures, and is often supplied by third parties, can be a double-edged sword,” it said.

But outsourcing can still be a good strategy for universities, especially when they need to quickly anticipate workforce needs and provide the training people want — something they’ve struggled to do — said Gates Bryant, a partner at Tyton.

“You have to ask the question, ‘Why can’t institutions do this for themselves?,’ and part of that is the inertia associated with their existing business model: recruiting students out of high school who are going to pay X thousands of dollars over a certain number of years for a bachelor’s degree,” said Bryant. 

“Institutions are looking at every source of revenue they have right now and trying to figure out how to do it better,” he said. “And if the private sector can be helpful in this way, that’s a powerful opportunity.”

Some deals cover much more than single courses or programs.

The University of Arizona, for example, in December wrapped up its acquisition of for-profit online provider Ashford University. The fine print locks the public Arizona university into a 15-year contract with Ashford’s former parent company, Zovio; after Zovio makes guaranteed minimum annual payments to what is now known as the University of Arizona Global Campus, it will be reimbursed for the costs of recruiting, marketing and other services it provides, plus get 20 percent of tuition revenue.

Faculty, staff and graduate students in the University or Arizona’s own college of education have blasted the arrangement in a petition as “ill-advised, “ill-conceived” and “bad business.”

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Partnerships with private developers are also going beyond just building dorms. Strapped for infrastructure money, universities and colleges have made deals with third parties to build and run parking garages, student centers, labs, classrooms and power and water plants; the colleges and universities lease back the properties, or the contractors get revenue generated from student fees.

The University of Iowa in late 2019 approved a 50-year deal to lease its power and water-treatment plants to an energy company for $1.2 billion; under the agreement, it will immediately invest the money into a fund to be used for teaching, research and financial aid. Then it will pay the company $35 million a year plus the cost of operating the facilities, which could come to more than $2 billion over the life of the contract. The university also paid $13 million to the private consulting firms that negotiated the arrangement.   

“Institutions are looking at every source of revenue they have right now, and trying to figure out how to do it better. And if the private sector can be helpful in this way, that’s a powerful opportunity.”

Gates Bryant, partner, Tyton Partners

The University of Kansas set up a nonprofit corporation to issue bonds that paid for two construction companies to build a 285,000-square-foot science center, a student union, dorms and parking as part of a $350 million project; the university makes lease payments to the nonprofit corporation, which uses the money to pay off the debt. It said the innovation saved between $25 million and $100 million and several years off the usual process.    

But outsourcing doesn’t always save as much as promised.

After Washtenaw Community College in Michigan got fed up with the rising cost of, and escalating problems with, its information technology department, it signed a five-year contract in 2019 worth about $26 million with the private company Ellucian to provide IT  services at what it announced would be a savings of more than $600,000 a year. Subsequent financial documents show that buying out its own full-time IT employees cost the college roughly $2.3 million, wiping out nearly four years of those savings.  

As universities and colleges continue to compete for a dwindling pool of students, they also increasingly rely on the multibillion-dollar enrollment management industry that provides recruiting, marketing and other services to admissions offices.    

Universities say it’s often cheaper to pay private enrollment management companies than to hire people in such high-demand specialties as the data analytics used to predict which applicants are the best prospects. 

Critics blame the enrollment management industry for pushing institutions to shift financial aid from low-income students to higher-income and out-of-state ones who can pay more.  

“If for-profits are taking over, it’s really just about getting warm bodies in seats, and it’s not about the mission of the institution any more,” said Joni Finney, director of the Institute for Research on Higher Education at the University of Pennsylvania.

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Universities are also hiring private companies to answer questions about financial aid and academic support, collect student data and provide essential online tools called learning management systems for remote and in-person courses. Two companies, Blackboard and Canvas, control almost two-thirds of that market, according to BMO, and the number of institutions building their own learning management systems has shrunk to almost zero.

In addition to the private companies including Aramark, Compass Group and Sodexo that manage campus dining halls, Barnes & Noble College runs 968 and Follett more than 2,700 physical and virtual college bookstores.   

“What we’re seeing is a real blurring of the lines between nonprofit and for-profit higher education.”

Michelle Dimino, education senior policy advisor, Third Way

Even companies that help universities manage research are reporting record growth. One is Cayuse, which handles research administration for UCLA, Ohio State, the University of North Carolina and others; that lets researchers focus on their work and be more efficient, said Adam Mertz, vice president of marketing.

“It’s just been further amplified because now the technology team is just trying to keep the lights on for the faculty and students,” Mertz said.

With new attention to the return on their investment in an education, however, students may want to know more about where their money is going — and to whom — said Dimino, of Third Way.

“Those questions are really pressing and really tangible right now,” she said. “If they continue, universities will have a lot to reckon for in explaining that to them.”

Tierney, at USC, was more philosophical.

“Right now what [colleges] are trying to do is throw everything overboard so they can balance the budget. But in this rush to balance the budget, in the long run, we might find we’ve hollowed out the center of the institution so dramatically that there does become the question: What is higher education?” he said.   

“What’s the university about when we outsource everything?”

This story about outsourcing in higher education was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for our higher education newsletter.

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