Concordia University Portland Closure: There’s more to the story

If you haven’t had a chance yet, make sure to read Friday’s article from OregonLive about the sudden Concordia University closure announcement and the role its Online Program Management (OPM) contract with HotChalk played in the school’s demise. From “Concordia University’s online vision hid grim reality”:

Concordia University’s future appeared bright to the hundreds of people who filled a blue-lit Portland ballroom to raise money for the historic school. Interim president Tom Ries took the stage and joked with the crowd as he wore a fur-lined winter hat, a nod to his Minnesota roots.

Hours earlier, he had delivered a very different message to the school’s trustees: Concordia’s finances had deteriorated so fast that leaders now had to decide between shutting down or rolling out a dramatic consolidation that might still fail. [snip]

In a draft version of Ries’ speech to trustees, he spelled out the “pronounced challenges” of Concordia’s 20-year deal with HotChalk, a California firm the school had paid hundreds of millions of dollars to jumpstart its online programs. The financial success of the deal depended on “overly aggressive enrollment targets,” Ries planned to say. Declining enrollment devastated the university’s finances.

The school shutdown announcement came out less than a week after the fundraiser. Reporters Jeff Manning and Molly Young did an excellent job obtaining and analyzing internal documents from the university, including effects from enrollment reductions in combination with an OPM contract with onerous terms. Some of the findings:

● Concordia leaders bet the college’s future on a partnership with Hotchalk. Over time, the school’s finances became dependent on HotChalk, and their operations became closely intertwined. The college routinely paid at least one-third of its revenue — as much as $62 million a year — to HotChalk.

● College officials approved the deal despite terms that increasingly left Concordia with less money and HotChalk with more. By 2019, the share of revenue that went to HotChalk exceeded 50%. When enrollment stopped growing at double-digit rates, the university had virtually no money to pay.

● Concordia appeared trapped in the relationship with HotChalk even as the deal drained its cash reserves. A 2018 internal analysis said the college’s liability to HotChalk could be as much as $400 million in the event of a liquidation.

The article describes how Concordia worked with HotChalk to launch a Masters of Education that quadrupled total enrollment between 2009 and 2013, followed by a $1 million settlement with the US Department of Education in 2015 for violating federal regulations (neither organization admitted wrongdoing under the terms of the agreement).

Data on Enrollment

At this point, however, I start to question if we’re getting the full story.

Ries said the school’s total enrollment dropped from 8,000 four years ago to 5,400 today.

This implies ongoing enrollment decreases over a multi-year period; however, the IPEDS data seem to tell a different story. If you look at total enrollment (undergrad + grad) from Fall 2012 – 2018 (the latest data point), you don’t see a constant drop over four years. Rather, you see a dramatic drop from 2015 – 2016, coincident with the ED settlement agreement, with enrollment actually increasing from 2017 – 2018. You can also see how much Concordia became a school defined by its graduate online program enrollments (and revenue). Below “exclusive DE” = fully online students, “no DE” = on ground students, and “some DE” = students taking both online and on ground courses.

Concordia University Portland Enrollment by distance education type, 2012 - 2018, for undergrad + grad and for grad only

We don’t have data for 2019 or early 2020, but President Ries’ statement above about enrollment of 5,400 indicates there has not been another huge drop.

OPM Contract Terms

The article does point to some onerous contract terms with HotChalk’s revenue share actually increasing over time, with a 20 year contract.

Concordia’s internal revenue-share document says HotChalk’s cut increased to more than half in July 2019 and was slated to increase again in July 2020. Each bump would cost Concordia nearly $5 million, “even if no growth took place,” the document said.

Concordia would keep just $1 of every $3 in shared revenue by 2024.

“This gives a sense of the size of the business model challenge,” it said.

The document rightly points out the underlying business model, which led to financial losses for Concordia even with the stabilized enrollments.

A September 2018 budget forecast for Concordia’s partnership with HotChalk said a “simple extrapolation of current trends” in revenues and costs showed Concordia would lose money on the venture in the foreseeable future.

By 2020, the “budget gap” would add up to $7.8 million for Concordia, the projections said.

To be clear, I am not implying that all OPM vendors have onerous terms – in fact, there is increasing variety in the market on revenue models and terms. It is specifically HotChalk’s situation and its terms with Concordia that I find onerous in this story.

Premature for Conclusions, However . . .

We need to admit that the information is too recent to support true conclusions at this point, and the enrollment data above show that there are nuances to be considered. However, it certainly appears that several factors came into play.

  • Concordia University Portland has a history of poor financial management;

  • The school relied on online education, using an OPM contract, as its cash cow;

  • The OPM contract terms were onerous (20 years, escalating revenue share for vendor); and

  • When the overall online enrollment environment changed, the house of cards started to fall despite successful efforts to stabilize enrollments.

OPM Postscript

The news coverage rightly focuses on the Concordia University planned closure and its impact on students. But there is another angle for those watching the OPM Market – whether HotChalk can survive this loss of customer.

Based on the strength of the Concordia University Portland revenue, HotChalk raised $230 million from Bertelsmann in 2015. This is the same year as the ED settlement agreement, and as shown in the data above the same year Concordia’s enrollment had its massive drop. HotChalk was valued at just under $500 million after the Bertelsmann round – a level that shocked many observers at the time (myself included).

While the news media missed mostly during 2015 was that HotChalk had one large client – Concordia. There were other clients, but the total revenue from Concordia was the vast majority of HotChalk’s revenue in 2015, and today.

This situation might help explain the onerous terms in the case of contract termination.

A footnote offered additional detail, which has been edited for clarity: “Should Concordia terminate without cause, they are obligated to pay HotChalk an amount equal to the past 36 months of revenue, plus full reimbursement of revenue advances made by HotChalk at time of termination.”

HotChalk likely needs this large payment to remain financially viable itself, but with the school’s current assets of $38.5 million, I would venture that this lifeline is not forthcoming. We could possibly be witnessing the collapse of a high-profile OPM vendor as well as a private university. It looks like it’s time to update this graphic:

OPM market as Mad Max scene, with OPM providers chasing the collegiate online program revenue, often at their own peril.

Update 3/1: Clarified my comment on onerous contract terms.