The Economic Advantage of Online Education

Can we apply the lessons of Adam Smith to higher education? Can colleges be compared to tee shirt factories? These are the burning questions of our times, at least for those of us in higher education.
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I am about to attend a conference of mostly traditional university business school deans. There is a panel I will participate in, entitled "Online, Hybrid, or Neither"? The title gives you some indication of
the view held by the majority of attendees, for whom Neither is the status quo. I will be as welcome
in this gathering as Donald Trump at an Occupy Wall Street rally. To be more specific, my view on the
topic of online education is that the revolution is well underway, and the naysayers may as well ready
themselves for retirement.

When an economist refers to a "revolution", he/she means a dramatic change, not a battle; as in Industrial Revolution, Agricultural Revolution, Information Revolution. This change is often attributed to the introduction of a technology that changes the way things are done; e.g., a reaper, a steam engine, a personal computer. However, as Peter Drucker pointed out in 1999, the real revolution and resultant cost savings that occur in an industry do so as a result of industrial engineering and the teachings of Adam Smith, rather than the technology itself. (The Wealth of Nations, 1776). Yes, a sewing machine may increase the seamstress' productivity from 1 shirt to 5 shirts per day; but it is the assembly line and specialization of labor that can magnify those results. Can we apply these lessons of Adam Smith to higher education? Can colleges be compared to tee shirt factories? These are the burning questions of our times, at least for those of us in higher education.

Distance education has been around for nearly 30 years, if we go back to the first Computer Assisted Learning Center in 1982; and web-based services in the area of education
date back at least 15 years. Blackboard was founded in 1997. Around 2000, I began using Webex for Sunday night help sessions with my executive MBA students. I recall the freedom of "working" in my pajamas (no web camera, please) coupled with personal savings of time and gasoline for me and the students. There were no labor savings to the institution; the technology provided greater access.

Attendance at my sessions climbed from 5 students per live sessions to 50 at each webex event,
resulting in capacity concerns for the new technology. It is no surprise to me that last year saw 1 million new online learners, according to the Sloan Consortium. The real wonder is why it took so long. Every day we read about growing enrollments for schools that have embraced online learning; but the revolution did not occur until (mostly) for-profit colleges entered the market with new business processes (i.e.,industrial engineering) that essentially created an assembly line approach to course development and delivery.

So what does this assembly line in higher education look like? Instead of one professor creating and
delivering a course; we see the following lineup of education workers: A) course designers, B) content developers, C) course facilitators, and possibly, D) tutors and graders. The course designer, Worker A, is an instructional technologist, perhaps with a master's degree in education, expert in learning objectives and assessment of learning. The content developer, Worker B, is the scholar in the field who will populate the course website with readings, notes, taped lectures or speeches, assignments, etc. The course facilitator, Worker C, is the instructor or mentor, who interacts with students and guides their learning. Tutors (Worker D, or an outsourced service) can be utilized for learners with more than average learning challenges; eliminating the need for office hours. And finally, in what can be described as icing on the cake for faculty considering whether to go online, the graders (Worker D, again) are called in to objectively evaluate student submitted work, using rubrics provided by the course designer and content developer. Theoretically, this lowers the cost of higher education by reducing the number of hours required of the scholar in the education process, and replacing that scholar with professionals who specialize in the various other activities; and who are normally lower paid than a chaired professor in finance. Moreover, it frees up the scholar to focus on the research, which justifies that high salary.

An example of the potential savings may be useful here. Suppose that worker A earns $1500 per week, worker B earns $5000 per week, worker C earns $500 per week, and worker D earns $200 per week for the various activities described above. Workers A and B will work together for 8 weeks to put a course together. Worker C will work 12 weeks to deliver the course and worker D will work 10 weeks to tutor and grade student work. The cost for one offering of this "section" is $1500*8 +$5000*8 + $500*12 + $200*10 = $60,000. The course will break even if 40 or more students take the course, paying $1500 each. Future offerings of the course will make a profit, (economists and accountants, please forgive me for ignoring fixed costs for this example), as long as tuition covers workers C and D, or there are 6 or more students generating the requisite $8000 per section.

Now let's go back to the traditional model. Worker B does course development, delivery, tutoring and grading. I realize this is an extreme case. Most tenured professors will have PhD students to share the burden. But the cost of having worker B spending most of his/her time during say, 16 weeks, doing the equivalent of creating the syllabus, researching and producing course content, holding weekly office hours, putting up a course website and (ugh) grading is (conservatively) $90,000, even if that individual is more efficient than workers A,C and D at all of the above. At $1500 tuition, you would need 60 students to break even each time the course is offered. Or, 40 students per section would have to pay at least $2250 per course, (50 percent more than in the other example). If you were a university president or a freshman parent, which model would you prefer?

So, in asking yourself whether online learning and the production model described here will catch on, I think the answer is obvious. And, If history repeats itself, and if the lessons of economics are to be believed, the U.S. will be better educated at more affordable tuition rates, and scholarship will not suffer in the least. OK, but is this a lecture I'd like to deliver to a room full of business school deans who must advocate for tenured faculty? Maybe I should stay home.

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