Four Thoughts on Project Kitty Hawk Article

Pithy description of rev share vs. fee-for-service, and more

Author

Phil Hill
April 02, 2024

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Yesterday The Assembly / Open Campus published an article by Pam Kelley providing updates on Project Kitty Hawk (PKH), the $97 million internal OPM initiative from the University of North Carolina (UNC) system. The lede is that recent reports to the system Board of Governors and to the state legislature show that PKH has significantly changed its stated goals and business model.

“I can’t emphasize how big a deal this is,” Randy Ramsey, chairman of the system’s Board of Governors, told the board in November 2021, after N.C. legislators allocated $97 million in pandemic-recovery funds for the nonprofit venture. Ramsey promised Kitty Hawk would be “really groundbreaking for many, many years to come.” [snip]

But now, more than two years into its work, Kitty Hawk has hit difficulties. It has dropped its original business model and slashed enrollment projections. It also faces a deadline that complicates its task: It must spend its one-time $97-million appropriation by the end of 2026.

The article, in my opinion, is well-researched and balanced, pointing out the importance of the project and crediting the executive team running PKH with developing a more realistic plan than what was handed to them.

Read the whole article. But for now, I’d like to add context with four thoughts.

Whose Hubris?

Kelley quoted my 2021 article when describing the challenges that PKH faced.

Phil Hill, a Phoenix-based educational-technology consultant who publishes the On EdTech newsletter, has been watching Project Kitty Hawk since it was unveiled in 2021. Then, Hill cautioned that enrollment goals were too ambitious and noted that efforts in other states had struggled or failed, often because university systems didn’t get buy-in from campuses.

“The biggest risk that UNC faces with Kitty Hawk,” he wrote in 2021, “is a subtle one that too often is at the center of centralize vs. collaboration discussions. Hubris. The staff of the new organization with $97 million of funding viewing themselves as ‘the smartest people in the room.’ That risk killed many of the other state initiatives.”

Hill wasn’t the only expert with concerns. Zemp’s former boss, Southern New Hampshire’s President Paul LeBlanc, said he recommended Zemp highly to UNC system leaders, but cautioned Zemp that Kitty Hawk would be a tough job. “Many have tried to do centralized online services for state systems, and most of them have failed,” he said.

Hill, who has reviewed Kitty Hawk’s latest progress report, said its leaders made the right call to scale back enrollment projections that were unrealistic even under its fast-growth revenue-share model.

Now that I’ve done further research, including discussions with PKH executive staff, I think that this risk of hubris is accurate but different than in some other initiatives I’ve seen (e.g., at CalState Online). What you have with PKH is leadership that does seem to understand the severe limitations of the initial plans and funding (one-time, must spend by 2026) and also the potential of this initiative. At the same time, I think that the North Carolina Board of Governors and key legislators are the ones suffering from hubris and undue optimism.

Add to this risk a lack of governance from the board. Read the article and note the lack of understanding, and note the lack of tough questioning from the board. Only two of the board members asked any real questions at all, two refused comment for the article, and two begged off stating they didn’t know enough. If you watch the online videos, it comes across as the board chair is the one pitching the initiative - that is not oversight.

Two Key Charts

While the article is excellent, for those wanting a deeper dive, it is well worth reading the PKH report itself. Two of the key items from the article are shown in this report. This first is the program status to date, showing both online degree work an added re-enrollment effort. First the article description:

The nonprofit also has hired a company called ReUp to contact and re-enroll former UNC system students who never graduated. Kitty Hawk is paying ReUp $3.8 million and offering the service to campuses for free. Ten campuses, including UNC Greensboro, are using it. It has enrolled nearly 1,200 students.

Next, the key chart (page 29 of report):

The second chart from page 36 of the report shares more context on PKH’s efforts to offset financial burden on academic programs without using tuition rev-share.

Pithy Rev Share Description

Building on this major theme of Project Kitty Hawk proactively shifting away from a tuition revenue-sharing model to a fee-for-service one, there are impacts to consider. I’d like to highlight how Kelley described the impact of that business model change on specific schools.

Fearing the business would be thrown into chaos if the government disallowed revenue sharing, the nonprofit switched to a business model that charges fees for its services. In the long term, this model gives campuses a larger share of revenues. But in the short term, campuses owe money up front. And that can make the model a tougher sell.

At this point, UNC Greensboro backed out. Recent enrollment declines had already reduced its state funding, and partnering with Kitty Hawk meant “a projected loss of additional revenue,” Kimberly Osborne, the university’s interim vice chancellor for strategic communications, said in a statement.

Osborne said it would have taken UNC Greensboro three years to break even, even though Kitty Hawk offered an advance of funds. She also noted that Kitty Hawk’s credit hours would generate no state funding for the campus.

This is excellent, both in terms of concisely describing the gist of the different models and in terms of how it impacts real institutional programs. Even though Project Kitty Hawk is offering deferred revenue and startup grants, that is not the same as rev-share. Rev-share places the financial risk of starting a program on the OPM provider (internal or external) - if growth does not meet expectations, institutional programs may not make the expected revenue, but they are very likely to not have actually invested and lost anything. It is the provider that loses money overall. Rev-share allows a program to to create a program without capital investment.

One-time grants and deferred revenue payments act to minimize the financial risk of any academic program, but they do not eliminate the risk. There is still an investment and therefore a risk.

Project Kitty Hawk chose to prioritize the mitigation of regulatory risk and long-term program finances over the mitigation of start-up financial risk. That is well and good as a strategy, but it has a cost, and that cost is lower growth, partially as many academic programs and institutions are not in a situation where they can invest. That is what happened to UNC Greensboro.

My Approach Likely Wouldn’t Have Worked

In a recent Online Education Across the Atlantic podcast episode, I described the limitation of my argument for being more realistic in program goals. FWIW, it’s great that Apple Podcasts now automatically shares transcripts.

And when they put it out with the $97 million in 2021, the five-year financial plan projects 120 new online program launches and 24,000 net new enrollments across the system's university campuses by the 26-27 academic year. So that was the initial plans in 2021. And then if you fast forward, they've been making what I think are very good changes in the management of Project Kitty Hawk. [snip]

And, let's take a counter view. Take my argument on Kitty Hawk.

It was crazy to think they could do those numbers up front. Well, imagine if you had me proposing this to the legislature back there, saying, ‘no, no, it's not feasible. You should be looking for more like 8 to 10,000 new starts and 20 programs.’

Would they have gotten the $97 million from the legislature if they had that type of view? I mean, I don't like that type of approach, but isn't there an argument that if they didn't take those overly optimistic views, they wouldn't get the funding in the first place?

I hope the article and this additional context is useful for other online education initiatives, and for those interested in tracking public funding results.

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