Trade-off of Labor for Capital

by Michael K. Townsley | Jun 29, 2025 | Strategic Planning

This paper deals with the trade-off between labor and capital. For the purposes of this paper, labor is defined as compensation (pay and benefits) and capital is defined as plant, equipment, and land assets. In addition, this paper is interested in the trade-off between labor (faculty) and capital (technology). The economic trade-off model suggests the following general rules:

1. Labor can maintain its relative value to capital by possessing a non-replicable set of skills due to their knowledge about their capacity to produce a service, in the case of education, teaching a student.
2. Capital, that is technology, cannot be substituted easily for faculty because their unique knowledge is difficult to replicate the knowledge and special skills to produce a service or an educated student.
3. Capital, technology, as it improves its operational design to deliver education or educational skills, will replace labor.
4. Depreciation is a major issue in comparing the trade-off between labor (faculty) and capital goods (technology). The latter is depreciated while the former is carried at full cost. Although economists may describe the supply of faculty as human capital, they are not treated as such on financial reports. Because faculty are always carried at full costs, financial reports give the impression that given an equal ten-year supply of labor and capital goods, labor will tend to be worth more, which makes investment decisions more problematic.
5. An underlying assumption on trade-offs is that they are fluid and easily made. However, this assumption is violated when regulations or contracts limit the tradeoff. For example, these obstacles to trade-offs are evident in higher education:
   1. Accreditors often regulate how courses are taught or how programs are delivered;
   2. Government regulations can constrain the trade-off between faculty and technology;
   3. Tenure makes it costly to release instructors and replace them with technology;
   4. College mission statements may require the use of faculty to instruct students;
   5. Student markets may prefer faculty over technology;
   6. Donors who would like to maintain traditional instruction and favorite faculty may oppose replacing them with technology.

The following table illustrates the current trade-off between compensation and plant. Compensation is a proxy for faculty because of how IPEDS classifies its data.^[1] Since IPEDs does not clearly separate faculty compensation or technology, the data uses total compensation and plant, equipment, and material as proxies for labor and capital goods. The table uses a ratio of total compensation to total plant by year.

Starting in 2020, colleges invested more funds in capital goods (plant, etc.) than in labor (compensation). The ratio between compensation and plant^[2] fell to its lowest in 2021. The low point occurred during the COVID pandemic in 2021, when colleges made large purchases of technology for faculty and students so that instruction could continue during the pandemic. In 2022, the trade-off began to reverse as colleges either reduced or increased investment in faculty or reduced investment in technology.

The slope of the quadratic equation suggests that the trade-off favored labor after 2022. Whether the claims about the value of AI will reverse the trend will have to be seen.

1. Integrated Postsecondary Education Data System ↑

2. See Chart ↑

Should Private Colleges Join Together as a University?

by Michael K. Townsley | Jun 29, 2025 | Strategic Planning

Michael TownslePurpose of the Paper: Describe a model of a university which incorporates formerly independent colleges so that the new unitary institution has the financial resources to provide long-term financial stability while offering a credible degree at a reasonable price.

Risks to the Survival of Private Colleges

1. Demographic Cliff – the student pool is projected to shrink between 16% and 29% across the country for the next fifteen years. Many tuition-dependent private colleges will not be able to survive this calamitous decline in the student pool.
2. Unfunded Institucional Aid – in 2023^[1], 51% of the 163 private colleges with less than 2,000 FTE, which discounted tuition by more than 50%, were in deep financial distress.^[2] As unfunded tuition discount increase, the amount of cash that flows from tuition revenue declines proportionately.
3. The Federal government is proposing massive reductions in Pell grants and may make it nearly impossible for part-time students to remain eligible for Pell grants.
4. These three conditions may well drive tuition dependent colleges with enrollments greater than 50% into financial distress over the next fifteen years.

Why a University Made-Up of Private Colleges Could Survive

1. By producing an economy of scale that is not available to the individual college;
2. By eliminating duplicate expenses concentrating expenses in the university;
3. By having larger budgets for marketing;
4. By having available larger financial reserves to create a buffer against unplanned continencies and delays in the opening of the university.
5. By having the funds to invest in the best technology for instruction and administration.

Standards and Compliance

The university should set-up a standards and compliance office to assure that institution provides a college degrees at a reasonable price by minimizing operational costs while complying with legal and accrediting standards and while operating within institutional policies and procedures. The office would be responsible for these matters;

1. Internal financial audits that oversee compliance with financial: policies, procedures and provide the board, president, and chief financial officer with regular compliance reports citing problems and offering solutions;
2. Cost performance that analyzes the cost of operation for all aspects of the university include plant and grounds and files regular reports with recommendations on how to improve cost efficiency.
3. Operational standards that will oversee compliance with the policies and procedures of the university and file reports on compliance issues with recommendations to improve performance.
4. Academic oversight that reviews academic operations, such as class schedules, instructional performance, student outcomes, and all other matters that delineate if students meet graduation standards. These reviews will be regular filed the president, board of trustees, and chief academic officer.
5. Plant, equipment, and gowns analyses to determine that buildings, equipment, and grounds meet safety standards and operational reliability. Regular reports will go to the president, board, and chief of plant and equipment.
6. Technology performance that identifies these issues: reliability, capacity to serve the administrations and academic programs, and recommend when technology should be updated. These reports should go to the president, board, and chief of technology.
7. Preparation of an annual report on standards and compliance that recommends revisions to standards and compliance requirements.
8. Provide the president and chief administrative officers with budgets and forecast to assure that the institution complies with legal, accrediting, and institutional policies and procedures.

Organizing the University

1. The institutions will need to sign a joint covenant that sets out:
   1. The purpose of the university – is it an administrative center, an instructional delivery center;
   2. The purpose of the individual colleges after the university becomes operational;
   3. Conduct audits of each college prior to the formation of the university;
   4. Full disclosure of each college regarding legal, accreditation, and governmental regulatory issues;
   5. Governance of the university, avoid shared governance;
   6. Common and clear statement of the relationship between the individual colleges and the university in terms of authority, responsibility, communications, regular financial, academic, and operational audits, and methods of resolving disputes;
   7. Hire a top-rated higher education attorney;
   8. Hire a president with the operational, academic, business skills, and governance skills to manage the organization and running of a new university.
2. The university must clearly state the funds to be contributed by each college for working capital and other aspects of capital and financial operations management of the university.
3. Here are several benchmarks to estimate the financial reserves needed to establish the university and provide financial stability over the first several years of operation
   1. Use the ratio of total unrestricted reserves (this is an estimate to test the ratio) divided by forecasted expenses that is greater than seven years to estimate the financial reserves needed for operations;
   2. Use the Cyert Equilibrium to identify what conditions would produce disequilibrium over seven years;
   3. Set as a financial goal to have seven years of financial reserve capacity to assure that the college has sufficient time to organize and conduct operations.
4. Incorporate the university
   1. Determine the location of the university;
   2. The individual college corporations will be terminated, and these colleges will be subsumed under the corporate structure of the university;
   3. Draft the incorporation documents of the university to include: mission statement, bylaws;
   4. At or prior to incorporation formally notify the state department of education and relevant federal agencies;
   5. Name the board to oversee the corporation.
5. Basic Actions Needed to Establish a Joint University:
   1. All legal documents for the operation of the university should be reviewed with legal counsel;
   2. Prepare operational policies and procedures;
   3. First employee to be hired should be the new president with an administrative assistant;
   4. The next hires should be chief administrators. The chief administrators should be prepared to do the detailed work to get their area prepared for operation;
   5. Find the best chief administrators and pay them well;
   6. Chief administrators must know how to do every job in their departments because they will be organizing and managing those departments while the university is building its financial reserves;
   7. Prepare administrator, faculty and staff contract templates;
   8. Prepare university, student, and employee handbooks;
   9. Select a financial operations system;
   10. Develop budget templates for capital and operational expenses;
   11. Develop grant and compliance oversight procedures;
   12. If the college intends to use debt for capital or working capital – identify the source of debt funding and initiate negotiations to identify interest rates and covenants;
   13. Design the first year, ongoing operational and academic schedules;
   14. Develop a marketing plan for the college that clearly states target markets and plans to reach the target markets.

Alternative Structure with Critique

1. Alternative – Consortia
   1. Consortia have been traditionally organized to support colleges in providing services for students and operations. They are typically loosely organized and depend on the willingness of member colleges to maintain the consortia. The primary difference with the university is that this plan subsumes the operation of several colleges into a single corporate entity with governance of academic and all other operations at the university level.
   2. Examples of Consortia:
      1. Goddard limped along for decades because they were never able to put together a coherent model. The college’s model had two campuses on opposite ends of the country. Goddard opened in 1938 as a single campus and closed in 2024.
      2. Claremont Colleges are a consortium of seven independent colleges. The consortium was founded in 1925. The Claremont Graduate College is its weakest link with 10 years of deficits.  Claremont shares costs, but the individual institution remain as separate entities.  My proposal is different – the individual colleges divest their corporate structure and folded within the university
      3. Community Solution Education System appears to be a collaborative network, where the colleges maintain their own corporate structure; note the following from their site:

“Each community that makes up The Community Solution Education System is stronger and more resilient because of our integrated model. While each institution’s Board of Trustees exercises operational oversight for strategic growth, our model employs a collaborative process where Board members and leadership within our colleges, universities, and the System can gain insights and learnings from each other to ultimately enhance the academic experience, student success, and sustainable growth of each institution.”

• Critique of Consortia and Value of a University Corporation:
  • Consortia are a loosely structured arrangement that typically are focused on administrative support such as: IT, supplies, marketing, and other aspects that will help reduce the costs of operation. However, consortia typically have little, if any, control over the operations of the colleges that make-up the consortia.
  • Value of independent private colleges joining together as a university include: strong financial base for long-term financial stability, improve the likelihood of survival during an unprecedent fifteen year demographic crisis; pool resources to maximize marketing campaigns, fund that meet academic standards while operating within cost standards; and provide a greater opportunity for the board of trustees and president to make difficult and long-term decisions that reduce risk, sustain academic quality, and maintain a strong and independent governance structure in the face of conflict and opposition to change.

  Summary

  Setting up a university that takes over the operations of individual colleges will result in conflict, heartbreak, and setbacks. The leaders of the university and the individual college must have the will and the ability to withstand the attacks made by interested parties and other entities who will passionately oppose the new university. In addition, the board of the university must be prepared for law suits and injunctions to stop or delay the establishment of the university.

  The leaders cannot falter in their decision to move forward because the best long-term solution for survival of the colleges is by becoming part of the university. They must press-on or be prepared for the greater pain of watching the individual colleges fail and fall by wayside.

  An example of a group of private colleges forming a private university could be a set of small religious college in or near a major city incorporating as a university.

  1. The last year that IPEDS data was available on unfunded financial aid.; ↑

  2. Source: IPEDS data for 2023. ↑

WHAT TO DO WHEN EVERY PART OF THE COLLEGE IS BROKEN!

by Michael K. Townsley | Jun 29, 2025 | Strategic Planning

Issue: Operational failures happen when untrained employees and unreliable policies and processes lead to egregious errors, raise the cost of operations, and negate leadership,

Small List of Operational Failures:

1. Student registration records are regularly lost;
2. Course books and other materials are not ordered;
3. Grades are not reported on time;
4. Students do not receive their grade transcripts as scheduled;
5. Graduates do not receive their transcripts and when they do there are major errors;
6. Student Financial Aid is not processed in time for students to complete enrollment;
7. Federal reports on financial aid are late and often not file until the government agency sends a warning to the campus.
8. Accounts payable are not paid and vendors are cutting off services to the campus;
9. Significant errors in employee paychecks;
10. Taxes and benefits are not transmitted as required and may go months without being filed;
11. IT systems fail frequently delaying work for hours and even days;
12. Buildings, classrooms, offices, and athletic facilities are closed because the college does not monitor maintenance problems;
13. Health departments close food services due to significant health concerns;
14. Debt service payments are late or u unpaid which results in financial agencies warning that they will take legal action;
15. Audits are not conducted or are late due to large errors in the college’s bookkeeping systems.

Causes of Operational Failures:

1. Employees ignore policies and processes;
2. Policies and processes are not updated to respond to changes in the organization or new government regulations;
3. Administrators do not understand policies and procedures;
4. Administrators are antagonistic toward leadership and purposefully refuse to follow policies and procedures;
5. Administrators do not understand the work that they are supervising;
6. Employees are assigned to work for which they are not trained nor have the skills to complete their duties;
7. There is no regular oversight of major tasks.

Assumptions About Retraining vs. Replacement

1. Colleges with severely broken processes usually are in state of financial distress;
2. Financial distress does not provide the time nor the resources to retrain employees;
3. These colleges tend not to hire nor pay for the best employees for key positions;
4. Since key administrators in these colleges do not understand the work of the work of their department, they are unable to train those employees.

How to Fix a Broken College Under the Preceding Conditions

1. The college will need to dismiss key administrators and incompetent employees, subject to their conditions of employment;
2. The college will need to spend money to get the best chief administrators who know the details of the work in their departments;
3. New non-administrators must be closely supervised and trained to assure that work is done correctly. Well-trained employees often are able to work more efficiently; therefore, the college will not need as many non-administrators.

Caveat: If opposition to fix a severe operational breakdown of is so great, more than likely the college will slide deeper into financial distress.

Why Ambiguity Causes College Leadership to Fail in Times of Crisis

by Michael K. Townsley | Jun 29, 2025 | Strategic Planning

Concept of Ambiguity and College Leadership

Michael Cohen and James March were the first to introduce the concept of ambiguity as a factor that confounds decision making in higher education. Decision-making is muddled because there is no single person who has final decision authority. Rather, decisions-making is diffused across numerous points due to a dual system of governance, boards of trustees who have no stake in their decisions, and presidents who avoid consequential decisions because they could imperil their careers their career.

The ambiguity of decision-making causes a high level of risk for financially fragile institutions. Quite simply, these institutions often lack the financial reserves to survive delays as strategic decisions meander through the decision system.

We need to take apart the concept of ambiguity in decision-making to get at its effect on decisions in higher education.

Exegesis: Concept of Ambiguity in Decision-Making

• Decision Definition: is a statement to act at some time in the future, subject to the authority granted by corporation by-laws, the board of trustees, and the policies and procedures of the institution.
• Traditional Structure of Decision-Making in a College
  • Positions authorized; in general, every position may make a decision subject to the by-laws, authority assigned to position, the scope of the work, and the set-of-levels in the organization or its clientele.
  • There are two decisions structures operating in most colleges –
• Collegial structure that typically includes the faculty and researchers assigned to the faculty. Decisions in collegial structure usually require consensus of its members, and in most cases, it requires either unanimous consent or a significant majority.
• Hierarchical structure where authority is distributed like a ladder with the scope of authority distributed from the lowest position with the scope of authority broadening as positions rise in the ladder.
• In both the collegial and hierarchical structure, the scope of authority is customarily defined within narrow bounds that limits the range of decisions within both structures. In the case of a hierarchy, the scope of authority will also be limited by the type and number of subordinates and the relationship to a superior position.
• Concept of Authority
• This paper will only deal with the legal-rational aspects of authority and will not consider other forms such as charismatic or traditional (inherited by right of birth)
• The paper uses Max Weber’s concept of legal-rational authority; i.e., authority is rules based through a legal set of policies and procedures.
  • Faculty Collegial Decision Authority; may have: decision authority over academic programs and operations without recourse by the president or the board of trustees; authority to recommend decisions directly to the board without input of the president; authority to recommend to president who has the authorization to pass the recommendation to the board, alter the recommendation to the board, or veto the recommendation.
• Decision-Making Methods
  • Decision Action Options should clearly state: the action requested, the position to be charged with carrying out decision, the parties affected by the decisions, the costs and benefits of the requested decision, and the time line for implementation.
  • Choice Set includes the set of options concerning a particular decision.
  • Choice Analysis Conditions:
• Deadline for Submission to Decision Authority
• Description of the Issue
• Data Describing the Issue
• Cost/Benefit Analysis
• Priority Rank of the particular issue compared to other issues that are being considered.
• Decision Statement should clearly state the content of the decision, the date for implementation, who is responsible for carrying out the decision, others who are affected by the decision, and a method for evaluating the outcomes of the decision.
• Ambiguities in Decision-Making; these are the factors which can confound decision-making:
  • Colleges and universities are hot beds for ambiguities in decision-making because they are a hybrid of an administrative hierarchy and a faculty governance system. Decisions that affect the productive center of the college involve collegial faculty governance and an administrative hierarchy. The problem for the administration is that they have a legal responsibility for long-term financial and operational stability of the institution, while the collegial faculty tend to work through governance issues in terms of their self-interests.
  • A complicating aspect of a hybrid hierarchical-collegial governance system is that before a decision can be proposed or implemented, the decision must be sanctioned by the next higher level and the next lower level below which is affected by the decision must concur.
  • The general condition of the college at the time that a decision is to be made. The general condition includes: financial, enrollment, general economic and political conditions, academic issues; accreditation, and law suits. In other words, any condition that muddies the decision-process and slows decision-making or renders a decision moot;
  • The number of competing interests in the college;
  • The leadership style of the president and the board of trustees;
  • The skills of chief administrators as they manage their areas.

Leaders and the Confounding Effect of Ambiguity in Decision-Making

• General Definition of a Leader is someone who is has the capacity to: recognize the problem, see a solution, knows how to convince others within the organization of the existence of a problem and accept the solution to the problem, and is able to work with the needs of others so that they can direct their efforts to support a solution and gain the benefits of a solution.
• Task-Oriented Leaders; least capable of producing an acceptable decision when the ambiguities of decision major crisis and people want to solve the problem to save their jobs.
• Political-Oriented Leaders more capable of producing an acceptable decision when ambiguities of decision-making are operative; however, it may not be the decision that the college needs at the time.
• Combination of the Task-Oriented and Political-Oriented Leader has the greatest chance of guiding an organization towards a goal that maintains resources to support its mission and to design programs to effectively deliver its mission.

Example of Failed Leadership When Ambiguities in Decision-Making Confounds a Leader An Example from a Recent Article in the Wall Street Journal^[1]

This example discusses the leadership style of Elon Musk while he was head of Doge. Although his work was not in higher education, it did involve work in organizations where clear-cut decision hierarchies were not evident and where politics muddied and often distorted the decisions which he attempted to make.

“The qualities that made Mr. Musk a transformative force – his single-minded pursuit, his dismissal of conventional wisdom, his willingness to disrupt – become vulnerabilities when transplanted into political discourse.”

“What Mr. Musk encountered also reflects a broader societal shift. The technologist-politician- who believes solutions to human problems can be coded or engineered is an increasingly common type: Mark Zukerberg’s flirtation with politics, Bill Gates public-health initiatives, and Jeff Bezos’ influence in urban development all exemplify the appeal of applying technological problem-solving skills to societal challenges. Each also face backlash and controversy, underscoring the fundamental gap between the methodical logic of technology and the unpredictable passions of the electorate.”

“Politics require softer skills: empathy, strategic patience, and the ability to manage competing narratives.”

“Engineers [business] thrive by eliminating ambiguity. Politics thrive on it” An engineer’s worldview is insufficient to deal with partisanship, ideology and personal vindictiveness

1. Clayburn, Joshua (June 6, 2025)“Musk is a Genius but He Isn’t a Political One”; Wall Street Journal; Musk Is a Genius, but He Isn’t a Political One – WSJ ↑