Optics, patches and mergers

Sometimes articles crash into each other. This week Josh Kim’s review of Size and Jessica Blake’s piece on mergers within higher ed landed on the same day. They’re worth reading together.

It’s hard enough to gain economies of scale in a service industry that relies on relationships. It’s that much harder when enrollments decline. Large schools have a built-in advantage over smaller ones, all else being equal.

Politics matters as much as economics. At least with public institutions, the same legislators who complain loudly about costs don’t want to be responsible for actually closing a college. The optics of a closure are terrible. It’s the same reason that a bag of 20 cookies in the kitchen will give up the first 19 or so on day one, but the last cookie will linger for days: nobody wants to be the one to throw out the bag. When survival becomes untenable, a merger solves a political problem neatly. It rebuilds scale after years of cuts and offers the (often overstated) prospect of saving money on top of it.

I suspect the next several years will bring far more mergers than closures.

Mergers have limits. Some missions aren’t especially compatible, for instance. (My favorite example, which probably wasn’t even the result of a merger, was a store in Agawam, Mass.: Dave’s Soda and Pet City. It sold soda and pets. What soda and pets had to do with each other was anybody’s guess.) More to the point, when the projected savings from mergers fall short of projections, the answer is probably not yet another merger.

In the short term, mergers can mitigate the damage from earlier cuts by rebuilding scale seemingly for free. But the savings tend to be underwhelming, and they don’t solve the larger issue. The two mega-institutions Kim cites—WGU and SNHU—both have moved in the direction of competency-based instruction. They’ve recognized that breaking the assumed identity between learning and time is the only way to cure Baumol’s cost disease. Mergers don’t address the underlying business model, but they can buy some time. For a legislator with an election coming up, that carries weight.

Economies of scale are helpful, but if you’re scaling the same old business model, they only help so much.