I taught Cost Accounting for many years. I always had fun (okay, fun here is measured in the range of possibilities related to teaching accounting) covering the subject called Return on Investment (ROI), especially when it applied to selecting new products to add to your Product Mix with the goal of Maximizing ROI. The problem with trying to maximize ROI is that you are trying to maximize a percentage, and you can’t put percentages (as opposed to dollars) into the bank and pay your bills with it. The interesting part of the story (again, relatively speaking) is when managers make suboptimal decisions. A suboptimal decision is one that is in the manager’s (or his/her division’s) best interests, but not in the best interest of the company as a whole.
Yesterday, President Obama unveiled the first glance at his plan to give higher education an extreme makeover. Light on details, the plan does cover lots of ground, much of which would definitely upset some of the apple carts in higher ed. Trying to get a jump on the Tea Party – let me dub his plan “ObamaEd,” although I’m also quite partial to Obama.edu. ObamaEd is probably DOA in Congress, if for no other reason than the fact that he proposed it. Therefore, the two factions of the GOP will oppose it, even though it feels much more like a GOP-colored proposal than one from the other side of the aisle.
ObamaEd is an attempt to hold colleges and universities more accountable for the federal dollars that flow into their coffers. Fair enough, I guess, but as soon as you start changing things like funding formulas, people start trying to find a way to game the system. Here’s one of the more significant proposals in ObamaEd.
- New College Ratings before 2015. Before the 2015 school year, the Department of Education will develop a new ratings system to help students compare the value offered by colleges and encourage colleges to improve. These ratings will compare colleges with similar missions and identify colleges that do the most to help students from disadvantaged backgrounds as well as colleges that are improving their performance. The results will be published on the College Scorecard. The Department will develop these ratings through public hearings around the country to gather the input of students and parents, state leaders, college presidents, and others with ideas on how to publish excellent ratings that put a fundamental premium on measuring value and ensure that access for those with economic or other disadvantages are encouraged, not discouraged. The ratings will be based upon such measures as:
- Access, such as percentage of students receiving Pell grants;
- Affordability, such as average tuition, scholarships, and loan debt; and
- Outcomes, such as graduation and transfer rates, graduate earnings, and advanced degrees of college graduates. (emphasis mine)
Let’s just focus on the idea of basing the college ratings on the earnings of the graduates from each college. Not sure how big a role this will play, but let’s guess for now that it could be a significant factor. How do colleges game ObamaEd to their benefit? It’s really pretty simple. Start by cutting the programs with lowest rates of earnings for their grads. The earnings for the graduates of institution will be based on the average of all the different programs lumped together (or so it would appear at this time). Let’s take an example from the great state of Tennessee. Using some of the data from a recent report by CollegeMeasures.org, here are a few of the programs at the University of Tennessee-Martin. I’m leaving out some of the detail, but the data below should illustrate my point.
Earnings of graduates at UT-Martin (pages 8-11):
- Health Professions = $58,592 (highest)
- Engineering = $52,976
- whole bunch of stuff in between helps make the UT-M average = $37,140
- Philosophy and Religious Studies = $27,094
- Psychology = $26,205
- History = $25,248 (lowest)
You don’t have to be a cost accountant (although it helps) to figure out that if you eliminate the History program, your average earnings for grads at the institution goes up. Think of the $37,140 as being a weighted-average (which means that it is weighted by the number of grads in each major) of the earnings of the grads from all the programs. Get rid of the lowest-earnings program and your average goes up, and your federal rating goes up. The poor Psychology program is next. If it worked for History, it’ll work for them, too.
In fact, mathematically it will work for every program below the average. Just to add more intrigue, as you eliminate the lower programs, the average continues to go up, so that some programs that started out above the average, are now below the average and are now on the possible chopping block. If you carried it to the logical (okay, that’s a matter of opinion) conclusion, you’d cut everything except the Health Programs (uh oh, that’s another grouping of programs where some are better than others) and UT-M would now have grads that earn an average of $58,592 their first year out of college.
Would this be a suboptimal decision? Sure sounds like it. Would this actually happen? Probably yes, if we’re talking about cutting some of the lowest programs to bring up the average. Probably not if we’re talking about cutting everything except the highest performer.
However, you do need to be careful what you ask for.
(NOTE: in the maximizing ROI dilemma, the manager drops the least profitable product line, even if it is above the minimum level required by the company. Then drops the second least profitable line, etc., each time raising the overall ROI in the division. This makes his percentage go up, but hurts the company overall. Works the same way here with average graduate earnings.)