The Public Benefits to Privatization

• By Julie Sturgeon
• 07/01/05

Paul Pribbenow, Ph.D., inherited a financial crisis when he stepped into the presidency at Rockford College in Rockford, Ill., in April 2002. People backed against the wall do desperate things — Pribbenow donned his mission-based, vision-based goggles and examined the institution from top to bottom. He found 10 areas that had nothing to do with providing an education: food service, catering, grounds and facilities, maintenance and cleaning, information technology, bookstore, printing and copying, utilities, fleet and human resources.

And then he kicked them out.

Of course, college administrators are hardly shocked. Privatization isn’t a new concept on campus since the days when PBX stations began handling phone service. Food service and bookstores quickly followed.“The economies of scale just don’t make any sense, especially for smaller places,” says Pribbenow.“How can you justify having a full-blown IT operation where there are proven options that save you money and bring better skills to bear on your campus?”

What is new are the dollar savings. Rockford College shaved $614,000 from its indirect costs ledger through this move. When Virginia Commonwealth University farmed out a dozen services on its campus in the early 1990s, administrators began recording $100,000 in savings here, $100,000 saved there. Additionally, the vendors brought state-of-the-art equipment onto the Richmond campus without any capital expenditure on VCU’s end.

According to Lucy Morros, Ph.D., a former college president and now vice president for higher education services at Bridger consulting firm, the indirect expenses of running a university amount to about 30 percent of the overall budget. Within that slice, she knows labor eats up 60 percent of the outgoing dollars, but overall she peers into what she coins “the magnificent seven:” space, energy, contracts, maintenance, labor, technology and business practices. By effectively stewarding these indirect costs, she typically saves a campus between 30 and 50 cents per square foot.

“My passion comes from the fact that you can take those indirect dollars you’re inadvertently wasting over to the direct side,” she says. So far, she’s found $466,000 in savings for a private midwestern school with 1,800 students, $300,000 for a public university with a 6,000 enrollment and $300,000 for a private eastern college. “These aren’t low-hanging cherries,” Morros insists. “These are year-over-year savings.” Even the North Central Association’s new accreditation system known as AQUIP (academic quality improvement program) focuses on aligning institutions’ physical assets with their missions. But that’s a lofty benefit for administrators like Pribbenow, who are impressed with the here-and-now rewards. “When Follet Bookstore is in here talking to us about what they’re doing, we’re the customer, and it really changes the accountability structure, “ he notes. “We can ask them to do things or justify data in a way that would be more difficult if you were working through your own personnel system.”

Nor is privatization always about giving up control. Take Educational Housing Services’ newest brainstorm, for example. George J. Scott, president of this New York City-based player, has provided housing for 40 different colleges in the area since 1987. Today, he’s looking to build the residence halls on his customers’ grounds while he absorbs the debt and shoulders the cost of operating the residence halls. The universities would retain input on the design, amenities, policies on social behaviors (think drinking and smoking) and the rates Educational Housing Services charges. They can even buy out Scott’s residence halls at any point for cost.

For his part, he isn’t saddled with the union costs some universities carry, so the initial costs to build can be lower, and as a private developer he can offer the ability to get financing quickly. And with land costing $300 a square foot in the New York area, using the university’s grounds is about the only way he can expand his operations and still make a profit. It’s such a win-win situation, some administrators have approached him about a sale leaseback arrangement on their existing residence halls.

Still, some administrators shy away from privatization because they assume it means they must lay off the staff associated with these jobs. Pribbenow was certainly sensitive to that and insisted as part of the contract that his private sector partners hire those people caught in the switches. As a result, the same faces remain in his offices, but their salaries stem from the vendors. He also kept the tuition remission perks in place for those now-former employees who have someone in the eighth grade or older who wants to pursue a degree from Rockford College.

“Our more specialized employees, like IT and grounds and maintenance, have now entered into a working relationship with an employer who values their skills more than when they were on the college payroll,” Pribbenow points out. “What does the college president know about what you know about grounds? He says the lawn is mowed and the grass is green. So my sense is that those people are happier now and in a healthier environment.”

On the flip side, business issues like contract compliance, customer satisfaction and problem resolution remain the university’s responsibility VCU’s executives remind colleagues. So while you can walk away from many of the headaches and costs, it’s not a chance to abdicate.

“I’m always very clear with folks that I don’t think we’re the typical candidate here. In some ways, people are better off taking their time to find ways to make privatization appropriate for their institution as opposed to just jumping in as we had to,” Pribbenow says.