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Modeling the Financials of Online Courses and Programs: A Primer and Roadmap

June 2014 Office of the Vice Chancellor of Adminstration and Finance Berkeley Resource Center for Online Education 1


INTRODUCTION   In  addition  to  furthering  Berkeley’s  core  mission  of  access  and  excellence,  online  education  programs   offer  the  potential  for  a  new  source  of  funding  for  Schools,  Colleges  and  Departments.      In  many  cases,   the  scale  of  these  opportunities  may  be  large,  but  so  are  the  financial  risks.    Getting  the  economics  right   is  a  critical  challenge  and  needs  to  be  an  important  focus  early  in  the  design  of  online  programs—we   shouldn’t  allow  what  are,  in  some  cases,  once-­‐in-­‐a-­‐generation  opportunities  to  slip  through  our  fingers.         The  focus  of  this  primer  is  to  distill  much  of  what  we  know  as  a  campus  about  the  economics  of  online   programs,  to  assist  academic  leaders  with  the  design  of  robust  financial  models  (in  our  experience,   robust  is  not  equivalent  to  complex—in  many  cases  it’s  a  set  of  simple  but  critical  assumptions  that   matter),  and  to  provide  a  roadmap  for  the  review  and  refinement  of  the  model.        The  Berkeley  Resource   Center  for  Online  Education  and  the  Office  of  the  Vice  Chancellor  for  Administration  and  Finance  are   eager  to  work  with  academic  units  to  review  and  refine  financial  models  early  in  the  process  of  online   program  design.         In  the  preparation  of  this  primer  and  roadmap,  we  would  like  to  acknowledge  the  leaders  on  campus   who  have  been  early  experimenters  with  the  financial  modeling  of  online  education  programs,  including   the  members  of  Berkeley’s  Online  Steering  Committee,  as  well  as  Scott  Shireman  and  the  staff  at  the   Berkeley  Resource  Center  for  Online  Education  (BRCOE).       Sincerely       Diana  Wu   Executive  Director  of  the  Berkeley  Resource  Center  for  Online  Education  (BRCOE)         John  Wilton   Vice  Chancellor  for  Administration  and  Finance      

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Berkeley’s Strategy  for  Online  Education  and  the  Berkeley  Resource  Center  for  Online   Education  (BRCOE)   In  the  spring  of  2012,  EVCP  George  Breslauer  and  VCAF  John  Wilton  convened  the  first  meeting  of  the   Online  Steering  Committee,  a  group  of  campus  leaders  charged  with  defining  and  helping  to  support  a   set  of  fundamental  principles  for  online  education.        From  the  outset,  that  group  recognized  that  a   “one-­‐size  fits  all”  campus  strategy  to  online  education  would  not  be  appropriate  given  the  very  different   pedagogical  needs,  discipline-­‐specific  differences,  and  educational  aspirations  of  Berkeley’s  Faculty,   Schools  and  Colleges.      Instead,  the  Online  Steering  Committee  embraced  the  notion  of  providing   Schools  and  Colleges  with  the  autonomy  to  embrace  online  education  in  different  ways  in  support  of   Berkeley’s  mission  of  Access  and  Excellence,  with  the  caveat  that  effective  financial  management  of   online  efforts  would  be  critical,  given  the  potential  scale  of  online  education  in  Berkeley’s  future.      At  the   time,  many  for-­‐profit  vendors  were  reaching  out  to  individuals  at  Berkeley  with  proposals  that  involved   significant  financial  issues  and  risks.      We  had  the  potential  that  Berkeley’s  online  offerings  would  be   fragmented  with  an  array  of  different  financial  terms  with  outside  parties  and  proprietary  systems  and   solutions.    In  the  summer  of  2012,  the  Steering  Committee  formed  the  Berkeley  Resource  Center  for   Online  Education  (BRCOE)  to  build  a  set  of  support  capabilities  competitive  with  what  outside  parties   were  offering,  both  to  provide  academic  units  with  supportive  and  objective  advice,  and  to  offer  a  range   of  services  in  instructional  design,  production,  and  hosting  appropriate  for  a  wide  range  of  online   offerings.      In  the  time  since  its  inception,  BRCOE  has  grown  significantly  and  now  serves  a  number  of   Faculty  and  Schools  and  Colleges  on  a  range  of  online  offerings  ranging  from  MOOCs  to  hybrid  courses,   to  fully  online  graduate  degree  programs.    Universities  across  the  country  have  recognized  BRCOE  as  a   strong  model  for  providing  in-­‐house  resources  while  maintaining  the  autonomy  of  Faculty,  Schools  and   Colleges  to  design  and  implement  online  offerings  aligned  with  their  individual  aspirations.  

Many Types  of  Online  Offerings   We  recognize  that  there  are  many  different  kinds  of  online  offerings  that  units  may  wish  to  develop  over   time.    They  include  online  degree  programs,  hybrid  programs  (i.e.,  includes  an  on-­‐campus  component),     fee-­‐based  courses,    free  courses  ,    free  courses  offered  with  a  fee-­‐for-­‐certificate,  and  contracted  online   educational  offerings  (such  as  corporate  training  programs).      The  financial  aspects  vary  widely,  both  in   terms  of  costs  and  potential  revenues,  and  we  are  continuing  to  learn  as  different  units  experiment  with   various  models.      We  look  forward  to  working  with  you  not  only  to  help  ensure  the  success  of  your   program,  but  to  add  to  our  collective  knowledge  as  a  campus.         When  building  a  financial  model  for  an  online  offering,  the  first  question  to  answer  is  whether  the   offering  is  intended  to  be  free  or  revenue  generating.        Revenues  can  be  in  the  form  of  tuition,    fees   charged  for  a  particular  course  or  module,  fees  charged  to  third  parties  (e.g.,  corporations  or  other   academic  institutions),  fees  for  content  licensing,  or  fees  for  a  certificate  or  grade  upon  completion.         Examples  of  non-­‐revenue-­‐generating  offerings  would  be  courses  that  are  offered  to  already-­‐ matriculated  Berkeley  students,  and  courses  made  available  as  a  public  good.    In  revenue  and  non-­‐ revenue  cases,  a  robust  cost  model  should  be  developed  that  addresses  both  the  up-­‐front  and  ongoing   costs  of  an  offering.      The  up-­‐front  costs  include  things  like  instructional  design,  royalties,  faculty   2  


compensation, testing,  and  initial  marketing.      The  ongoing  costs  include  the  costs  to  deliver  the   offering,  including  things  like  faculty  and  GSI  compensation,  administration,  admissions,  technical   support,  and  periodic  refreshes  of  the  content.      The  cost  model  should  differentiate  between  fixed  and   variable  costs,  that  is,  costs  that  are  incurred  regardless  of  how  many  students  use  the  offering,  and   costs,  which  vary,  based  on  the  number  of  students  served.    In  the  case  of  revenue-­‐generating  offerings,   the  financial  model  must  also  take  into  consideration  the  revenue  side  of  the  equation,  including:   • • • •

How many  students  will  be  paying,  given  a  reasonable  estimate  of  the  overall  market?   Is  the  amount  they  would  be  paying  reasonable,  given  alternatives?   How  do  we  anticipate  these  revenues  will  develop  over  time?   In  the  case  of  complex  offerings,  to  what  degree  will  early  revenues  offset  some  of  the   development  costs?  

Differences  in  Scope     The  budget  for  an  online  offering  can  range  from  less  than  a  few  thousand  dollars  (e.g.,    to  create  a   video  of  an  existing  lecture  to  an  existing  sharing  platform,  like  YouTube)  to  millions  of  dollars  per  year   to  develop  and  administer  an  online  professional  degree  program.        Examples  of  questions  that  affect   costs  include:     • How  much  new  development  of  course  materials  and  content-­‐-­‐  will  you  be  designing  new   course  materials,  including  things  like  interactive  simulations,  etc.?   • What  video  production  standard  is  required    (e.g.,  are  the  normal  pauses  and  “ums”  of  a  live   lecture  acceptable,  or  will  you  need  multiple  takes  and  extensive  editing?)   • How  will  students  be  interacting  with  Faculty  and  GSIs?    Will  there  be  separate  sections  that   GSIs  teach?     • What  kind  of  online  peer  learning/  collaboration  is  envisioned  (e.g.,  interactive  discussions   online,  online  student  projects)?   • What  kind  of  capabilities  will  you  need  with  respect  to  grading  online  work?       • What  kind  of  content  organization  issues  does  your  course  involve?   • What  kind  of  student  supports  will  be  necessary,  both  in  terms  of  academic  support  and   technical  support?     • What  kinds  of  data  collection  do  you  need,  in  terms  of  learning  outcomes,  how  students  engage   with  the  offering,  and  feedback?   • How  frequently  will  the  offering  need  to  be  refreshed?   • How  complex  will  the  management  system  be  to  admit,  matriculate,  and  graduate  students?   • How  much  marketing  will  be  necessary  to  drive  students  to  the  offering?            

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Rough budget  ranges  for  different  kinds  of  online  offerings:     Type  of  offering   Budget       Video  and  upload  of  an  existing  lecture  to  a  free   <$10,000   sharing  platform,  some  editing,  no  marketing         Development  of  online  materials  used  in   $10,000-­‐$80,000  for  video  production  of  mini-­‐ conjunction  with  a  traditional  in-­‐person  course   lectures,  upload  of  existing  materials  in  document   (e.g.,  online  modules  or  “flipped  classrooms”    (i.e.,   form  with  minimal  customization,  and  online   where  traditional  lecture  content  is  delivered   content  organization   online,  allowing  classroom  time  to  be  used  for   Potentially  $100,000  or  more  for  development  of   discussion,  etc.)   customized  simulations,  virtual  “labs”,  etc.         Development  of  EdX-­‐quality  MOOCs   $75,000-­‐$100,000  for  faculty  and  instructional     designer  time  to  develop  online  course  materials,   high-­‐quality  video  production,  grading,  etc.         Development  of  an  online  professional  degree   Potentially  $1,500,000—depending  on  number  of   program  (heavily-­‐online  hybrid  or  fully-­‐online   courses,  teaching  costs  (e.g.,  GSIs),  marketing   costs,  etc.           BRCOE  offers  consultation  to  Faculty  and  Deans  interested  in  developing  online  offerings  and  would  be   happy  to  work  with  you  to  understand  the  budget  implications  of  different  kinds  of  online  offerings.       Given  the  rapid  pace  of  innovation,  features  that  were  once  expensive  to  integrate  (even  a  year  ago),   may  now  be  practical  to  integrate  even  in  low-­‐budget  offerings.      Conversely,  there  are  certain  design   choices  that  can  meaningfully  increase  cost.      A  consultation  with  BRCOE  can  help  you  understand  and   optimize  your  choices.      

Common Misconceptions  about  the  Financial  Aspects  of  Online  Education   In  our  experience  so  far,  there  are  four  common  misconceptions  surrounding  the  financial  modeling  of   Berkeley-­‐caliber  online  education.     1.  Online  education  is  intrinsically  a  lower-­‐cost  way  of  educating  students.        Because  many  of   the  early  adopters  of  online  education  were  in  the  for-­‐profit  arena,  and  because  so  much  of  the   promise  of  online  commerce  has  been  focused  around  delivering  services  at  a  lower  cost,  there   has  continued  to  be  a  belief  that  there’s  an  intrinsic  opportunity  to  educate  students  more   cheaply  online.      Delivering  a  Berkeley-­‐caliber  educational  experience  is  costly,  whether  online   or  on  campus.      We  want  our  programs  to  be  at  the  forefront  of  experiences  and  outcomes,  so  

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we know  they’ll  be  costlier  than  some  other  online  offerings.    However,  we  must  also    avoid   unnecessary  costs  where  we  can—such  as  performing  certain  activities  “in-­‐house”  instead  of   paying  for-­‐profit  vendors  for  services  that  earn  them  a  large  financial  return.       2. The  campus  does  not  have  the  capacity  to  invest.        Developing  online  programs  requires   investment,  and  many  academic  units  lack  the  up-­‐front  capital  to  make  these  investments.        We   must  approach  these  investments  in  the  same  way  we’d  approach  our  other  high-­‐priority   financial  needs—with  creative  use  of  campus  resources  and  the  full  engagement  of  Berkeley’s   donor  community,  etc.      In  many  cases,  the  risk  and  payback  potential  of  an  investment  in  online   education  is  very  strong.      We  shouldn’t  resort  either  to  cutting  back  our  aspirations  or   partnering  with  for-­‐profit  institutions  in  ways  that  provide  us  with  access  to  near-­‐term  capital  at   a  high  long-­‐term  cost.    That’s  one  reason  why  it’s  so  important  to  build  financial  models  early  in   the  process—so  there’s  plenty  of  time  to  develop  options  for  making  these  investments.     3. The  primary  cost  of  online  programs  is  technology-­‐related.    For  many  of  us,  the  most  unfamiliar   part  of  online  education  is  the  technology,  whether  that’s  the  technology  involved  in  content   production,  the  platform  through  which  content  is  organized  and  offered,  or  the  tools  necessary   to  administer  the  program.    Technology-­‐related  costs  are  declining  at  an  extremely  rapid  rate.       The  most  significant—and  often  under-­‐recognized—costs  are  the  costs  associated  with   marketing  and  student  support.      Although  Berkeley  has  an  extremely  strong  brand,  the  level  of   marketing  required  to  attract  highly-­‐qualified  online  students  may  be  quite  different  than  for  an   on-­‐campus  program.       4. Developing  an  online  program  is  a  one-­‐time  cost.      Investments  required  to  refresh  courses,    as   well  as  investments  to  improve  the  quality  of  content  and  outcomes  and  incorporate  new   learning  technologies,  etc.  should  be  built  into  financial  models  as  a  significant  and  continuing   expense.      

Why  A  Financial  Model  Is  Important     For  many  Schools  and  Departments,  an  online  program  may  represent  a  significant  expense  and   significant  potential  source  of  revenue.      A  good  financial  model  is  important  whether  the  program  is   revenue-­‐generating  or  not.      Choices  made  around  program  design  and  delivery  can  impact  the  financial   performance  of  the  program  for  many  years,  either  by  making  them  more  costly,  impacting  the  number   of  students  that  can  be  enrolled,  or  changing  the  potential  demand  for  the  program.         Higher  up-­‐front  costs,  a  delay  in  reaching  projected  enrollment  numbers,  or  a  higher-­‐than-­‐expected   student  support  costs  can  be  the  difference  between  a  program  that  supports  itself  and  brings  much-­‐ needed  additional  revenues  to  a  unit  and  an  endeavor  which  could  profoundly  damage  a  unit’s  budget,   forcing  it  to  reduce  expenses  or  forego  growth  in  other  areas.      Given  online  education  is  a  relatively   recent  phenomenon,  we  do  not  yet  have  enough  experience  to  intuitively  make  program  design   5  


decisions and  know  the  financial  consequences—a  model  really  is  required  to  understand  program   economics.      In  addition,  a  good  financial  model  will  be  critical  to  any  kind  of  engagement  with  potential   donors  who  might  we  willing  to  fund  or  underwrite  all  or  part  of  an  online  program’s  expenses.     The  online  education  landscape  is  continuing  to  change  and  grow,  and  we  must  be  particularly  cautious   with  models  that  involve  a  long-­‐term  financial  payback.      Over  time,  we  must  assume  there  will  be   increasing  competition,  and  that  higher  competition  will  most  likely  result  in  greater  pressure  on  tuition   pricing  and  higher  student  expectations,  likely  resulting  in  the  need  to  raise  program  costs.      A  good   financial  model  allows  you  to  modify  assumptions,  see  the  results,  and  communicate  those  impacts  to   support  a  full  understanding  of  tradeoffs  and  potentials.      

When  to  Start  the  Process  of  Financial  Modeling  and  Who  Should  Be  Involved     Financial  modeling  should  be  an  iterative  process  throughout  the  design  of  an  online  offering.      There   are  a  number  of  people  who  should  be  involved  early  in  the  design  process:     BRCOE  -­‐-­‐Preliminary  financial  models  should  be  shared  with  the  Berkeley  Resource  Center  for  Online   Education  as  soon  as  practical  to  ensure  the  models  are  consistent  with  unit  financial  capacity,   campus  and  system  policies  and  practices  regarding  revenue-­‐generating  programs,  and  policies   regarding  contracting  with  outside  vendors.    BRCOE  may  be  helpful  when  considering  different   investment  scenarios  and  sources  and  can  also  help  you  develop  these  models   Campus  Legal-­‐-­‐The  campus  legal  department  already  has  significant  experience  working  on   contracts  and  other  issues  related  to  online  education,  and  they  should  be  involved  early  in  the   design  of  an  online  program.        They  can  be  helpful  in  understanding  various  potential  risks  and   options,  which  may  have  implications  on  your  financial  model.    You  should  not  wait  until  you  have   draft  contracts  in  hand  to  begin  engaging  with  the  legal  department.     Academic  Committees/Reviewers-­‐-­‐  Academic  approvals  are  designed  in  part  to  ensure  new   programs  can  be  delivered  in  ways  that  are  realistic  and  executable,  and  that  programs  will  not   compromise  reputation,  resources,  or  delivery  in  other  areas.    Questions  related  to  program   expenditures,  financial  sustainability,  risk  mitigation  and  other  finance-­‐related  issues  will  likely  be   part  of  the  academic  review  and  approval  processes,  and  you’ll  need  the  financial  model  to  respond   to  those  questions.           Leadership  from  other  Departments/Schools-­‐-­‐  Sharing  financial  models  with  leaders  from  other   departments  and  Schools  may  be  helpful  for  at  least  two  reasons.      First,  they  may  have  experience   with  some  of  the  assumptions  you’ll  be  making  in  your  model.      Second,  we  believe  there  may  be   mutually  beneficial  opportunities  in  many  cases  for  smaller  units  to  pool  or  share  costs  when   developing  online  programs.    

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What the  Financial  Model  Should  Look  Like     Appropriate  revenue  models  can  be  done  in  Microsoft  Excel  or  a  similar  standalone  spreadsheet.       BRCOE  has  developed  several  templates  that  are  available  for  your  use.    It  is  not  typically  necessary  to   use  any  central  financial  data  or  systems.    The  critical  aspects  of  effective  financial  spreadsheet   modeling  are:     • Providing  an  easy  way  to  flex  assumptions,  and  see  the  impact  on  the  financial  model.    Key   assumptions  include  enrollment,  revenue  per  student,  course  development  expense  (including   faculty  and  GSI  expense),  and  marketing  expense.      Later  in  this  document,  we  will  provide  some   benchmarks  and  questions  to  use  to  generate  these  assumptions.           • Providing  a  year-­‐by-­‐year  revenue  and  cost  projection  that  begins  with  the  initial  year  of   investments  and  extends  sufficiently  far  out  into  the  future  to  provide  a  good  window  into  the   long-­‐term  impacts  of  the  program  economics  on  the  unit  and  campus.         • Providing  a  few  select  outputs  in  chart  and  tabular  form  that  can  be  used  to  communicate  the   program  economics  in  a  simple  way  (discussed  below)     The  three  most  critical  outputs  of  the  financial  model  are:   1. Understanding  the  timing  of  costs  (and  revenue  when  revenue-­‐generating),  which  is   dependent  on  the  scale  of  the  program,  projected  enrollment,  etc.      The  timing  chart  should   clearly  show  the  point  at  which  breakeven  occurs  (i.e.,  revenues  from  enrollments  begin  to   exceed  costs).      This  output  is  critical  to  setting  expectations  regarding  the  magnitude  of   surpluses,  and  the  amount  of  time  required  before  surpluses  will  appear.      It  is  also  the  key   output  for  discussing  whether  assumptions  around  enrollment,  costs,  and  revenue  per  student   are  appropriate.     2. Understanding  the  total  up-­‐front  investment  required.      The  total  up-­‐front  investment  is  the   sum  of  investments  required  prior  to  any  student  revenue,  and  the  sum  of  costs  less  revenues   (the  accumulated  deficit)  after  student  revenues  begin,  but  prior  to  the  point  where  the   program  is  at  break-­‐even.        This  output  is  critical  to  begin  discussions  around  potential  sources   of  investment.   3. Enrollment  sensitivity  analysis.      The  costs  of  delivering  an  online  offering  are  a  combination  of   fixed  and  variable  costs—that  is,  costs  that  vary  with  enrollment.      The  primary  risk  of  a  revenue-­‐ generating  offering  is  that  enrollment  does  not  materialize  as  expected,  either  due  to  a  lack  of   demand  for  the  program  or  an  unexpected  inability  to  serve  the  number  of  students  envisioned.         Understanding  how  the  economics  of  the  online  offering  change  under  lower  enrollment   assumptions  is  the  most  critical  element  for  assessing  the  potential  financial  risk  of  the  offering.         For  larger  efforts,  such  as  online  degree  programs,  it  is  important  for  academic  units  to  fully   understand  the  magnitude  of  potential  deficits  that  could  be  created  if  enrollment  projections   do  not  materialize  and  costs  become  a  drag  on  unit  budgets—the  potential  budget  impact  on   units  could  be  severe.    

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Modeling Costs   Their  four  broad  categories  of  costs  in  an  online  offering  are:    

Content development     and  production

Designing the  course,  developing/producing  learning  materials,   designing  online  grading  mechanisms,  teaching  the  course,  etc.

 

Marketing

   

Student supports

Conducting market  research,  Identifying  potential  learners,   conducting  outreach  as  n ecessary  to  attract  interested,  qualified   students Create  mechanisms  for  supporting  online  students  academically,   administratively,  and  with  technical  questions

   

Platform

Customize and  integrate  the  tools  necessary  to  manage  and  deliver   content,  enable  interaction  and  collaboration,  and  host  student   work  

Content  Development  and  Production  Costs   Content  development  and  production  costs  can  be  broadly  grouped  in  three  categories.    The  first   category  is  the  “up  front”  costs  required  to  design  courses  and  develop/produce  learning  materials.     Typically  these  costs  include  compensating  the  faculty  member(s)  developing  the  course  as  well  as  an   instructional  designer  (such  as  the  ones  employed  by  BRCOE)  who  can  work  closely  with  the  faculty   member(s)  on  the  production  of  the  content.        The  second  category  is  the  costs  required  to  teach  the   course,  including  faculty  time  and  various  improvements  and  “tweaks”  to  the  materials  that  may  take   place  during  the  course.    The  third  category  includes  the  costs  to  periodically  refresh  the  course.      Based   on  our  experience  so  far,  significant  new  production  and  development  costs  will  be  incurred  every  three   years  or  so.     The  instructional  designer  can  play  a  key  role  in  determining  the  costs  required  to  develop  online   courses.    The  role  of  the  instructional  designer  is  to  help  the  faculty  member  understand  the  unique   pedagogical  issues  associated  with  online  learning,  to  be  knowledgeable  about  the  tools  and  techniques   that  could  be  potentially  be  applied  to  the  online  learning  experience,  and  to  be  able  to  implement   those  tools  and  techniques  to  create  the  appropriate  online  educational  materials.      Content   development  can  vary  from  simple  video  production  of  existing  lectures,  to  a  wholesale  redesign  of  the   learning  experience  for  the  online  offering,  involving  simulations,  virtual  student  projects,  and  online   grading  technologies  which  may  represent  the  state-­‐of-­‐the-­‐art  in  online  learning.      In  the  first   consultation  with  an  instructional  designer,  key  issues  to  be  discussed  would  include:  

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• • • • • • • • • • • • • •

How does  the  online  offering  differ  from  traditional  courses  that  the  Faculty  member(s)  have   already  taught?  Are  the  desired  learning  outcomes  significantly  different?   To  what  degree  is  the  method  of  teaching  different  (e.g.,  lectures  vs.  project-­‐based)?     Is  this  a  hybrid  or  a  fully  online  experience?   To  what  degree  is  peer  learning  expected  to  be  different?     To  what  degree  will  student  work  and  grading  be  different  (e.g.,  for  a  MOOC,  with  potentially   thousands  of  students  to  evaluate?)   How  much  of  the  content  is  already  developed  (and  potentially  even  digitized)?   What  are  the  production  standards  required  (e.g.,  do  lectures  need  to  be  “polished”   performances  vs.  more  informal  live  recordings)?   Given  all  of  the  above,  how  much  experimentation  will  be  involved  to  get  the  materials  right?         Will  we  need  to  test  the  materials  on  a  group  prior  to  offering  them?   Will  the  materials  being  developed  be  leveraged  for  multiple  purposes,  and  potentially  across   multiple  online  offerings  running  on  different  systems?   How  often  will  content  need  to  be  refreshed?   To  what  degree  will  GSIs  be  customizing  materials  for  their  sections?   How  many  modules/courses  will  we  need  to  develop  for  this  offering,  and  to  what  degree  can   we  sequence  the  development  of  those  modules/courses  over  time?   What  kind  of  data  gathering  and  analysis  will  be  required  on  learning  outcomes,  online   experience,  etc.?        

Marketing  Costs   Marketing  costs  can  be  a  significant  expense  in  online  offerings.      Many  Faculty  (and  even  Schools  and   Colleges)  may  have  limited  experience  in  issues  related  to  marketing,  particularly  if  they’re  associated   with  well-­‐established  academic  programs  at  Berkeley.        Online  marketing  has  proven  tricky  even  for   those  experienced  in  it;  many  e-­‐commerce  companies  have  fallen  prey  to  a  “build  it  and  they  will  come”   mindset,  mistakenly  assuming  if  great  content  was  offered  online,  consumers  would  naturally  find  their   way  to  it  and  begin  using  it.  Thinking  through  how  prospective  students  will  find  and  select  the  offering   is  important,  even  when  the  offering  is  being  delivered  through  an  existing  platform  that  may  draw   enormous  amounts  of  traffic.      A  useful  framework  when  thinking  about  marketing  challenges  is  the   “marketing  funnel”,  which  lays  out  the  sequence  of  steps  that  a  prospective  customer  (or  in  this  case  a   prospective  student)  goes  through  from  initial  awareness  to  use.      Each  step  may  require  unique   strategies  and  support,  depending  on  the  nature  of  the  online  offering  being  envisioned.  

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Awareness

Selection

Trial

Loyalty

How do  people   become  aware   that  the  offering   exists?

How do  they   decide  this  is  the   right  offering  for   them?

What compels   them  to  try  the   offering  (vs.   inaction?)

What compels  them  to   use  it  again,  or   encourages  them  to   recommend  it  to   others?

Given  the  “funnel”  concept  above,  the  kinds  of  questions  worth  asking  with  respect  to  an  online  offering   include:   • How  will  prospective  students  find  this  online  offering,  and  what  kind  of  outreach  will  be   required  to  make  them  aware  of  the  offering?   • Are  prospective  students  part  of  relatively  cohesive,  easy-­‐to-­‐target  populations  (e.g.,  a  particular   occupation  that  might  be  members  of  a  professional  society,  etc.)?       • To  what  degree  are  there  other  alternatives  to  get  a  similar  education  online  or  through  a   traditional  in-­‐person  learning  format?       • What  will  be  the  primary  selection  criteria  for  prospective  students  (e.g.,  Berkeley/Faculty   reputation  vs.  course  scope  vs.  way  the  content  is  being  offered  online?)   • To  what  degree  are  there  important  issues  that  prospective  students  need  to  be  aware  of  and   weigh  in  their  selection  decision  (e.g.,  prerequisites,  or  the  opportunity  to  take  the  course  for  a   certificate,  for  example)?   • What  kinds  of  support  will  be  required  to  support  decision-­‐making  by  prospective  students  (e.g.,   virtual  brochure,  in-­‐person  admissions  sessions,  online  course  syllabus,  trial  brochure,  etc.?)   • How  will  the  questions  of  prospective  students  be  answered  (e.g.,  calling  the  School/College,   call-­‐center,  online  FAQ)     For  large-­‐scale  revenue-­‐generating  offerings,  such  as  online  academic  degree  programs,  we  would   strongly  encourage  units  to  conduct  formal  market  development  studies.      Given  the  questions  above,   the  market  development  studies  should  include  not  only  an  analysis  of  the  revenue-­‐generating  potential   of  the  program,  but  also  the  marketing  strategies  necessary  to  attract  prospective  students.      BRCOE  is   ready  to  assist  with  market  research  and  development  studies.        For  additional  information,  please   contact  BRCOE.    

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Student Support  Costs   Student  support  costs  include  the  full  range  of  expenses  required  to  meet  the  academic,  administrative   and  technical  support  needs  that  online  students  have.        Depending  on  the  offering,  this  may  include   components  such  as  academic  advising,  tutoring,  virtual  “office  hours”,  admissions  and  registrar   functions,  career  support,  access  to  libraries  and  data  sources,  opportunities  for  student  interaction   outside  the  virtual  classroom,  and  technical  support  (i.e.,  questions  and  issues  relating  to  the  use  of  the   online  platform  itself).      Certain  needs,  such  as  technical  support,  can  often  be  provided  at  a  relatively   modest  cost  from  outside  vendors,  with  the  benefit  that  these  vendors  are  capable  of  supporting   students  across  all  time  zones.         However,  even  in  cases  where  these  functions  are  outsourced,  the  time  and  staffing  required  to  assist   with  the  design  of  student  support  procedures,  and  interfacing  those  functions  with  campus  functions   (e.g.,  registrar,  admissions)  can  be  more  extensive  than  expected.      It  is  important  to  consider  what   resources  will  be  required  to  ensure  that  a  full  set  of  student  support  processes  are  designed  and   implemented,  to  monitor  those  processes,  and  offer  channels  for  “escalation”  if  students  can’t  get  the   support  they  need.      Unexpected  strains  on  existing  support  systems  are  very  likely  to  occur  unless   student  expectations  are  well  defined  and  internal  processes  are  designed  and  implemented  well.        It  is   particularly  important  when  units  are  designing  large-­‐scale  online  programs  that  they  do  not  simply   assume  that  students  will  use  the  channels  designed  for  them.    For  example,  if  an  online  student  taking   a  MOOC  with  thousands  of  other  online  students  uses  the  telephone  to  call  a  School/College  or  Faculty   member  directly,  how  will  they  be  received?      Other  questions  to  consider  when  thinking  through  the   costs  required  to  support  the  offering  include:   1. How  are  we  managing  the  overall  online  program  development  and  online  program  once  it  is  up   and  running  (e.g.,  how  much  time  of  an  Assistant  Dean,  dedicated  support  staff?)   2. Are  there  innovative  ways  we  would  reduce  these  costs  (e.g.,  pooling  resources  with  other   Schools?)   3. How  will  our  staff  be  trained  to  deal  with  inquiries  or  student  support  issues  relating  to  the   online  program  that  come  to  them?      If  students  to  go  other  campus  units  (e.g.,  Libraries),  are   those  units  prepared  to  receive  them  or  know  what  level  of  assistance  to  provide?   4. How  are  we  planning  to  provide  academic  support  to  students  in  online  programs  (e.g.,  GSIs)?       What  will  be  the  ratio  of  GSIs  to  students?   5. How  will  we  handle  administrative  functions  (e.g.,  admissions,  registration,  etc.)?   6. How  will  we  handle  technical  inquiries  about  how  to  use  the  learning  platform,  etc.?   7. Will  we  be  serving  students  in  different  time  zones,  and  will  we  need  to  be  able  to  provide   technical  support  24x7?   8. Is  there  a  hybrid  (e.g.,  residency)  component  to  the  program?    If  so,  what  will  be  the  costs   associated  with  having  those  students  on  campus?   9. How  will  we  be  assessing  learning  outcomes  and  program  performance?      Will  we  have   dedicated  staff  to  do  that?  

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10. How much  of  an  issue  do  we  anticipate  with  attrition—and  will  we  need  resources  to  provide   academic  counseling  to  students?   11. Are  their  ways  we  intend  to  integrate  the  online  program  with  our  on-­‐campus  students—if  so,   what  kinds  of  resources  do  we  envision  will  be  necessary  to  accomplish  that  objective?    

Platform Costs   The  costs  associated  with  learning  platforms  are  decreasing  quickly  and  dramatically.    There  are  now   numerous  learning  platforms  available  that  allow  learning  content  to  be  presented  and  managed,  with  a   range  of  features  for  content  organization,  collaboration,  managing  student  data,  student  evaluation   and  support,  etc.      BRCOE  primarily  provides  support  to  two  platforms—Canvas  and  edX.        Both  Canvas   and  edX  are  adding  new  features  and  functionality  on  a  regular  basis,  and  the  industry  as  a  whole   appears  to  be  migrating  toward  more  open  standards.    These  new  features  are  also  helping  to  “round   out”  the  platforms  to  reflect  the  diverse  needs  of  different  academic  disciplines.      Unlike  several  years   ago,  the  costs  associated  with  the  platform  are  more  related  to  the  use  of  particular  features,  which   may  increase  content  development  expense  and  complexity.       1. Are  there  requirements  for  our  learning  platform  that  will  be  atypical  (e.g.,  unusual   collaboration  features,  student  data  management  issues,  etc.)?      To  what  degree  will  new   software  need  to  be  written  or  customized?   2. How  much  of  the  offering  will  be  customized  to  a  particular  platform?    If  we  wanted  to  offer  the   course  on  another  platform  (e.g.,  moving  a  Canvas  course  to  edX,  to  example),  how  much  work   would  be  necessary?   3. How  much  will  we  need  to  invest  in  training  to  get  our  Faculty,  GSIs  and  staff  fluent  in  the   platform?   4. Who  will  be  hosting  the  platform,  and  do  they  charge  for  their  services?     After  considering  the  cost  categories  above,  a  preliminary  cost  model  can  be  developed.      Below  is  a  cost   model  for  an  example  online  course,  developed  by  BRCOE:  

Example Cost  Calculation—Fully-­‐Online  Course   Line   Assumptions   A   B   C   D   E   F   G   H   I   J  

Item   Refresh  cycle  (years)   Sections/year   Students/Section   Course  units   Students/GSI   Refresh  cost   Instructional  design   Faculty  development  expense/Course  unit   Teaching  cost/GSI   Faculty  teaching  cost/Course  unit  

Value   3   2   200   3   50   20%   $35,000   $2,500   $10,000   $2,000  

Source   Assumption   Assumption   Assumption   Assumption   Assumption   Assumption   Assumption   Assumption   Assumption   Assumption   12  


K Development   L   M   N   O   P   Q   R   Teaching   S   T   U   V   W   X   Y   Z   AA   Total   BB   CC  

Support Cost/Student     Instructional  design   Faculty  costs   Initial  development  costs   Refresh  costs   Total  Sections  offered  (before  refresh)   Total  Refresh  costs   Total  Development  Costs     Total  Sections  offered  (before  refresh)   Faculty  Cost/section   Total  Faculty  costs   GSIs/Section   Total  GSIs  Required   Total  GSI  Costs   Total  Student  Taught   Total  Support  Costs   Total  Teaching  Costs     Total  Cost   Cost/Students  Taught  

$150   $35,000   $7,500   $42,500   $8,500   6   $51,000   $93,500     6   $6,000   $36,000   4   24   $240,000   1,200   $180,000   $456,000     $549,000   $458  

Assumption   =G   =D*H   =L+M   =N*F   =A*B   =O*P   =N+Q     =A*B   =D*J   =S*T   =C/E   =S*V   =W*I   =S*C   =K*Y   =U+X+Z     =R+AA   =BB/Y  

Modeling Revenues   Online  offerings  represent  an  important  and  long-­‐term  revenue  opportunity  for  the  campus.      At   present,  there  are  four  basic  revenue  models  that  are  being  widely  considered:   •

• • •

Traditional student  tuition  and  fees—  Depending  on  the  nature  of  the  offering,  these  tuition  and   fees  may  be  similar  to  what  is  being  charged  for  equivalent  units/courses  delivered  through   traditional  on-­‐campus  programs.      Financial  aid  might  be  offered.   Institutional  pricing—A  price  charged  to  a  third  party,  such  as  a  corporation,  to  provide  access  to   the  online  offering  to  its  employees,  for  example   Content  pricing—  Revenues  derived  from  licensing  of  content  to  other  academic  users  (e.g.,   embedding  an  online  module  in  a  course  offered  by  another  academic  institution)   Charging  for  certificates—Allowing  students  to  experience  the  offering  for  free  (e.g.,  as  in   “auditing”  a  course),  but  charging  for  a  certificate  of  completion.    This  models  may  require   mechanisms  for  student  tracking,  evaluation  and  proctoring  that  may  be  different  from  what  is   required  for  students  using  the  offering  for  free  

Modeling revenues  requires  setting  realistic  expectations  both  for  the  number  of  students  that  can  be   attracted  and  supported,  as  well  as  what  the  appropriate  pricing  would  be.      Also,  a  platform  needs  to   be  selected  that  can  manage  revenue  (e.g.,  payments,  accounting,  etc.),  including  revenues  potentially   coming  from  international  sources  and  international  currencies.        

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As mentioned  previously,  units  considering  large-­‐scale  revenue-­‐generating  offering  should  consider   commissioning  a  market  study  to  determine  the  appropriate  market  and  pricing  potential,  and  meet   early  with  BRCOE  to  discuss  how  incoming  revenue  streams  will  translate  to  unit  budgets,  given  existing   University  and  campus  policies.   Key  questions  for  modeling  revenues  are:   1. How  much  insight  do  we  have  into  the  demand  for  the  proposed  online  offering?      Are  there   clear,  addressable  segments  that  would  be  interested  in  the  offering?    How  large  are  those   segments?       2. How  many  of  these  addressable  segments  can  we  realistically  market  to  given  the  marketing   resources  we’re  envisioning?     3. Of  the  addressable  segments,  what  portion  would  likely  choose  our  offering  vs.  an  on-­‐campus   alternative?      Of  that  group,  which  would  be  interested  in  our  offering  vs.  competing  online   alternatives?       4. If  admitting  students,  what  portion  of  students  interested  in  the  program  would  meet  our   academic  qualifications?      To  what  degree  would  we  expect  the  yield  to  be  different  than  the   yield  for  existing  on-­‐campus  programs?   5. How  confident  are  we  in  our  internal  capacity  to  handle  a  certain  level  of  enrollment?      What  are   the  chances  that  we’d  need  to  scale  down  our  enrollment  assumptions  based  on  our  capacity?     6. How  much  insight  do  we  have  into  what  an  appropriate  price  would  be?      Would  the  value  of   the  degree  be  similar  to  the  tuition  charged  for  an  on-­‐campus  program?        Are  there  lower  cost   alternatives  available?   7.  If  we’re  not  charging  tuition,  but  charging  for  a  certificate  of  completion  or  something  else,  how   much  confidence  do  we  have  in  our  estimates  of  what  portion  of  students  would  opt  for  the  fee   vs.  free  option?   8. If  sizeable  portions  of  revenues  are  coming  from  international  sources,  to  what  degree  does   pricing  align  with  affordability  in  those  countries?   9. How  sizeable  are  the  revenue  risks?    Is  this  the  type  of  offering  where  external  factors  (e.g.,  a   downturn  in  the  economy,  or  additional  offerings  from  other  academic  institutions)  could  result   in  sudden,  large  changes  in  revenue?    

The Timing  of  Revenues  and  Costs  in  Revenue-­‐Generating  Offerings     Financial  models  for  online  revenue-­‐generating  offerings  have  a  typical  shape  (Fig.  1).    They  are  typically   characterized  by  a  period  of  up-­‐front  investment  prior  to  any  student  enrollment.        For  an  online   program  consisting  of  many  courses  delivered  over  multiple  semesters,  the  up-­‐front  investment  mostly   consists  of  the  costs  required  to  produce  the  initial  semester  of  courses.    Thereafter,  the  cost  to  develop   courses  can  be  offset  (at  least  partially)  with  revenues  from  the  initial  student  cohort,  which  greatly   reduces  the  total  up-­‐front  investment  required  to  deliver  the  program.    Over  time,  there  is  a  gradual   ramp  up  in  the  number  of  students  as  the  program  grows.      Many  programs  want  to  start  with  a  

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relatively small  first  cohort,  so  that  they  can  experiment  and  learn.      However,  the  smaller  the  initial   cohort,  the  less  revenue  will  be  available  to  offset  continued  investments  in  course  development.      Units   should  thoughtfully  consider  what  the  appropriate  rate  of  increase  in  student  enrollments  should  be.     On  one  hand,  an  excessively  fast  rate  can  produce  significant  operational  strain  on  Schools  and   departments.    On  the  other  hand,  an  excessively  conservative  rate  of  increase  over  multiple  years  may   be  excessive  for  the  purposes  of  “working  out  the  bugs”.    The  maximum  enrollment  level  will  depend  on   many  factors,  including  School/department/Faculty  capacity  and  aspirations,  reputational  issues,  and   whether  or  not  competitive  programs  exist.    As  the  number  of  enrollments  increases,  the  costs   associated  with  developing  the  program  gradually  decrease  to  a  steady-­‐state  required  for  refreshes  and   improvements,  while  the  variable  costs  required  to  serve  the  increasing  enrollment  increases.      At  some   clear  point  (hopefully)  revenues  begin  to  exceed  costs  and  the  program  is  generating  surpluses   thereafter.       Course  development  and  production  costs  generally  begin  1-­‐2  years  prior  to  initial  enrollment.    As   previously  mentioned,  in  some  cases  only  the  initial  semester(s)  of  courses  may  need  to  be  produced   prior  to  initial  enrollment;  the  balance  of  program  courses  can  be  developed  and  produced  while  the   initial  cohort  is  taking  the  first  set  of  courses,  thereby  lowering  the  amount  of  up-­‐front  investment   required  prior  to  first  enrollments.        Marketing  investments  may  need  to  precede  initial  enrollment  by  a   significant  amount  of  time  (e.g.,  1-­‐2  years).      Advertising/recruiting  investments  may  occur  12+  months   prior  to  launch,  however  PR,  branding,  website  design,  research,  and  other  costs  may  need  to  be   incurred  as  early  2  years  prior  to  launch.    Depending  on  the  program,  there  may  be  ample  applicants  to   fill  the  initial  cohorts  that  can  be  reached  with  minimal  up-­‐front  marketing  expense,  further  reducing  the   amount  of  up-­‐front  investment  required  prior  to  offsetting  student  revenue.      

Fig. 1  Revenue  and  Costs  by  Year Revenues

Costs

Initial investments  prior   to  any  student   enrollments

Initial cohorts  and   continued  investments

Increasing costs  to  serve  as   enrollment  increases-­‐-­‐break   even  and  surpluses

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The Breakeven  or  net  surplus  chart  (Fig.  2)  is  simply  revenue  net  of  costs:    

Fig. 2  Net  Surplus  by  Year

The total  investment  calculation  is  the  sum  of  deficits  in  the  net  surplus  chart  prior  to  breakeven.    This   includes  the  up-­‐front  investment  required  prior  to  any  student  enrollments  plus  the  years  in  which   student  revenues  are  below  total  costs.          

Sensitivity Analysis   A  revenue  sensitivity  analysis  should  be  performed  as  part  of  the  initial  financial  modeling.  The  revenue   sensitivity  should  reflect  a  moderate  downside  (e.g.,  20%-­‐-­‐  not  quite  the  demand  or  capacity   envisioned,  or  enrollment  growth  that’s  slower  to  ramp  up  than  anticipated)  and  sharp  downside  case   (e.g.,    50%-­‐-­‐  many  other  prestigious  universities  launch  similar  programs,  economic  downturn)  and  show   how  the  net  surplus  changes  taking  into  consideration  which  costs  could  (and  would  be)  varied  if   enrollments  didn’t  evolve  as  planned  (Table  1).        We  believe  there  are  a  number  of  reasons  why  it  is   important  to  model  downside  revenue  cases  (both  enrollment  and  tuition  levels):     •

There are  still  not  a  large  number  of  “data  points”  that  enable  confident  validation  of  what   tuition  levels  will  be  appropriate  for  different  kinds  of  programs  (e.g.,  fully-­‐online,  various  types   of  hybrids,  etc.)    across  different  disciplines,  at  Berkeley’s  reputational  tier,  and  across  a  global   student  population.      We  highly  recommend  modeling  a  conservative  tuition  level  and  ensuring   that  program  economics  work  at  that  level.   The  program  may  involve  fixed  costs,  which  could  lead  to  severe  financial  stress  for  Schools  if   enrollments  do  not  materialize  as  expected   16  


• •

• •

Some costs,  such  as  student  support  costs,  may  be  higher  than  expected  and  may  only  become   apparent  once  the  program  is  up  and  running   Some  programs  may  be  sensitive  to  global  economic  cycles  or  other  exogenous  factors—expect   that  over  a  10  year  period  there  may  be  a  recession  or  other  events  that  impact  demand  for  the   program   The  competitive  landscape  is  still  evolving—and  so  there  may  be  additional  entrants  at   Berkeley’s  tier,  or  with  more  attractive  program  offerings-­‐-­‐-­‐  this  is  still  a  rapidly  evolving  arena   There  are  reputational  risks—not  only  to  the  School,  but  to  the  campus  itself—if  enrollments  do   not  materialize  as  planned  and  units  may  face  a  strong  incentive  to  even  marginally  reduce   standards    

Note  that  it  is  easy  in  an  Excel  model  to  make  a  cost  vary  with  a  variable  like  enrollment  using  a  cell   formula  (e.g.,  $10  per  student).    The  sensitivity  analysis  is  more  than  just  that  kind  of  hard  coding,  and   should  include  some  thoughtful  contingency  planning.    For  example,  if  you  had  a  true  downside  case   scenario,  are  there  certain  investments  or  other  costs  that  you’d  remove  or  shift  out  to  protect  your   budget  from  an  excessive  deficit?        At  what  point  would  you  discontinue  the  program,  and  if  that   occurred,  what  would  be  the  costs  and  liabilities  associated  with  shuttering  the  program,  for  example   any  vendor  contracts  that  have  a  termination  penalty.        Obviously,  if  the  revenue  model  you’re   considering  is  not  a  program  up-­‐front  tuition  model  (e.g.,  fee  for  certificate  or  other  revenue  model),  the   enrollment  sensitivity  analysis  may  need  to  take  into  consideration  factors  such  as  student   attrition/completion  rates,  percentage  of  students  that  opt  for  the  fee-­‐based  option,  etc.      The  goal  is  to   accurately  assess  the  true  risk  that  an  academic  unit  would  face  from  a  “real  world”  downside   enrollment  scenario.  

Table 1—Enrollment  Sensitivity  Analysis     Year  

Base case  enrollment    

Per year  

1 2   3   4   5   6   7  

           

Downside case  enrollment  

Sharp downside  case   enrollment   Costs  removed:       Costs  removed:   • XX   • XX   • XX   • XX   • XX   • XX       Resulting   Per  year   Resulting   Per  year   Resulting   program  net   program  net   program  net   surplus     surplus   surplus                                                                        

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8 9  

 

 

 

 

 

 

Note  on  Outside  Vendors  and  “Turnkey”  Solutions   In  recent  years,  a  number  of  for-­‐profit  entities  have  converged  on  higher  education  as  a  profitable   market  for  services  and  solutions  related  to  online  education.      Many  of  these  entities  are  backed  with   significant  amount  of  venture  capital,  in  other  words,  with  investors  that  have  a  high  confidence  and   expectation  that  this  will  be  a  lucrative  industry.        These  vendors  typically  seek  a  split  in  student   revenues.    They  typically  divide  responsibilities  between  the  higher  education  client  and  themselves.     Often  the  college  or  university  is  responsible  for  content,  teaching,  and  admissions  criteria,  and  the   vendor  will  provide  services  such  as  course  production,  platform,  and  marketing.      In  exchange  for  the   revenue  split  and  long-­‐term  commitment,  they  often  will  provide  much  of  the  up-­‐front  investment   required  for  the  program.  There  are  a  number  of  reasons  why  colleges  and  universities  are  attracted  to   these  vendors,  including  a  lack  of  capital  resources  to  invest  in  developing  online  programs,  a  lack  of   technical  resources  and  know-­‐how  on  campus  to  develop  online  programs,  or  a  less  prominent   institutional  brand  and  reputation.      The  individual  costs  of  different  services  provided  by  these  vendors   are  often  bundled  in  ways  that  make  it  difficult  to  understand  what  the  costs  of  individual  services  are,   and  whether  those  costs  are  as  low  as  they  could  be.    The  contracts  required  to  appropriately  divide   responsibility  between  the  academic  entity  and  vendor  are  typically  complex,  and  fraught  with  potential   issues  and  risks,  given  the  interdependencies  required.      The  revenue  split  required  by  the  vendors  can   often  be  well  north  of  50%,    and  vendors  argue  that  this  reflects  the  fact  that  the  majority  of  the  costs   are  associated  with  items  not  provided  by  the  academic  institution.        We  fundamentally  believe  this  is   not  a  good  model  for  Berkeley.      We  believe  that  our  teaching  and  academic  experience  is  the  lion’s   share  of  the  value  that  we  provide.      We  believe  we  have  a  responsibility  over  the  long  term  to  be   independent  and  capable  of  delivering  online  programs,  just  as  we  do  on  campus.        And  we  believe  that   giving  a  fixed  portion  of  student  tuition—for  a  large  number  of  years—and  regardless  of  how  much   profit  has  been  generated,  or  what  return  on  investments  made  has  been  achieved—is  fundamentally   not  the  right  model  for  an  institution  committed  to  the  public  good.         We  must  be  careful  about  any  vendor  commitments  that  would  make  it  difficult  to  modify  the  design  or   delivery  of  a  program,  or  make  it  costly  to  discontinue  a  program.      New  online  programs  are  essentially   entrepreneurial  ventures,    and  like  any  entrepreneurial  venture,  maintaining  the  flexibility  to   experiment,  redesign  as  conditions  change,  and  modify  even  basic  parameters  of  the  delivery  model  are   critical  not  only  to  ensure  financial  performance,  but  to  ensure  that  the  program  remains  academically   excellent.       We  believe  that  over  time,  a  more  vibrant  and  flexible  set  of  vendors  will  emerge  that  will  work  with   universities  like  Berkeley  on  selected  parts  of  delivering  online  education,  and  in  a  fixed-­‐price  model   consistent  with  the  way  Berkeley  and  other  universities  typically  procure  services.      In  the  meantime,   there  may  be  valuable  ways  for  Schools  and  Colleges  to  work  with  external  vendors  on  specific  

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capabilities that  would  be  difficult  for  Berkeley  to  support  today,  such  as  24/7  technical  support,  specific   types  of  learning  experiences  (e.g.,  simulations)  or  international  marketing.    But  we  would  ask  that   Colleges  and  Schools  that  are  considering  working  with  external  vendors—and  particularly  those  that   might  be  considering  working  with  a  vendor  providing  comprehensive  or  turnkey  solutions—develop   strong  financial  models  that  clearly  show  the  risks  and  opportunity  costs  of  these  types  of  solutions,  and   inform  BRCOE  and  VCAF  early  in  the  project,  so  that  the  terms,  risks  and  economic  consequences  of   these  types  of  vendor  arrangements  can  be  thoroughly  considered  at  a  campus  level.      It  should  also  be   noted  that  the  vendor  contracts  required  for  large-­‐scale  support  of  online  programs  are  very  complex   and  require  significant  time  for  legal  review  and  approval.        

Roadmap  For  Input  and  Approval  on  Financial  Models   Step  

With Whom  

When

Preliminary conversation  

BRCOE

As early  as  possible  

BRCOE

Rough assumptions,   potential  work  with   outside  vendors  

Draft financial  model  

BRCOE

Prior to  seeking   academic  or  other   approvals  

Preliminary model   showing  the  three   outputs  described  in   this  paper  

Draft financial  model  

Approving bodies   as  necessary  (e.g.,   Senate)   EVCP,  VCAF  

Preliminary model   shared  with  VCAF  

Normal annual   deadlines  

Include financial   model  and   investment   requirements  

BRCOE, VCAF,   campus  legal   counsel  

Prior to  seeking   academic  or  other   approvals  

Terms of  contract   discussed  with   outside  vendor  

Annual budget   submission/strategic   plan/capital   investment  plan   If  significant  vendor   contracts,  preliminary   legal  review  (if   significant  vendor   contracts)  and   financial  review  of  

What kind  of   financial  model  to   have   Preliminary  intuition   as  to  size  of  program   (enrollment),   revenue  model,  and   scope  of  program   (e.g.,  how  many   courses,  etc.)  

Purpose Get  BRCOE’s   assistance  with   assumptions,   recommendations   of  other  leaders  on   campus  with   experience  in   similar  programs       Begin  to  consider   budget  options,   revenue  issues,  and   vendor  issues   Understanding  of   program  economics   ,  risks  and   investment   requirements   Understanding  of   program  economics   and  risks   Ensure  the   economic  model   into  the  regular   campus  annual   financial  review   process   Allow  sufficient   time  for  contract   review  

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vendor terms   Thorough  legal  review   BRCOE,  VCAF,   and  financial  review  of   campus  legal   vendor  terms   counsel  

Simultaneous with   securing  academic   or  other  approvals  

Draft contract  and   refined  financial   model  

Understanding risk   exposure,  financial   value  ceded  to   outside  vendor,   potential  for  sub   optimized  program   economics  

Assistance with  Development  and  Teaching  Costs  for  Revenue-­‐Generating  Online   Offerings   Given  the  potential  for  online  offerings  to  generate  revenue  for  Berkeley,  mechanisms  are  being   developed  to  assist  with  the  costs  required  to  establish  these  offerings,  including:   1.  MOOC  development  funding.      At  the  time  of  writing,  the  campus  has  made  available  some   funding  to  Faculty  for  the  development  of  courses  on  the  edX  platform.      Please  check  with   BRCOE  regarding  the  status  of  this  funding  for  future  MOOCs   2. Financing  from  BRCOE.    BRCOE  has  put  in  place  mechanisms—similar  to  those  offered  by  for-­‐ profit  outside  vendors  without  the  same  profit  motive  that  offer  funding  to  cover  the  up-­‐front   development  of  revenue-­‐generating  online  offerings  in  exchange  for  a  portion  of  the  revenue   earned  as  the  program  is  offered.      Please  check  with  BRCOE  regarding  this  funding.    

Other Guides   Over  time,  we  aspire  to  offer  a  library  of  guides  and  other  materials  to  assist  academic  leaders  with   planning  and  implementation  of  online  education,  including   • • •

Academic approvals  and  granting  of  credit  and  degrees   Thinking  through  intellectual  property  issues   Thinking  through  audit  and  advisory  issues  

Please do  not  hesitate  to  reach  out  to  us  for  the  latest  ideas,  best  practices,  and  information  regarding   online  programs—we’re  here  to  help.   To  reach  BRCOE,  please  e-­‐mail:    online@berkeley.edu     COO  Scott  Shireman,  scottshireman@berkeley.edu  or  call  510-­‐642-­‐3708   Director  of  Marketing  Chris  Van  Nostrand,  chrisvannostrand@berkeley.edu  or  call  510-­‐664-­‐4151   Executive  Director  Diana  Wu,  diana.wu@berkeley.edu  or  call  510-­‐642-­‐4181  

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Modeling the Financials of Online Courses and Programs: A Primer and Roadmap  
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