Ashley Putnam: Welcome to the fourth episode of Workforce Realigned, a special five-episode podcast series within Economy Matters that explores how innovative finance is reshaping the future of work. Workforce Realigned is a production of the Federal Reserve Banks of Atlanta and PhiladelphiaOff-site link in partnership with Social FinanceOff-site link. My name is Ashley Putnam and I'm glad to have you back. On our last episode we had an incredible conversation with the former governor of Massachusetts, Governor Deval Patrick, and the former speaker of the House of Representatives, Speaker Paul Ryan, about how government can play a role in investing in outcomes and what tools have worked and not worked so far to ensure that we're getting the best impact for workers and jobseekers. Today, we're going to be speaking with Michael Reeser, a chancellor at Texas State Technical CollegeOff-site link, about the role of higher education and a new funding formula they have tying higher-ed dollars to workforce outcomes. I'm excited to learn more about how education and technical colleges can ensure that students are getting the best for their dollar and how that has reshaped the culture and inner workings of TSTC.

Welcome, Michael. I'm wondering if you can open and set the stage with us. How have institutions like TSTC traditionally been funded and what are some of the challenges with that?

Michael Reeser: So conventionally, technical schools like TSTC are funded in a way that's similar to the rest of higher ed. That is, some sort of academic activity is used to drive the funding for the institution. For example, a contact hour or a credit hour may be the unit of measure. And TSTC was funded that way for nearly 50 years until we converted to a wholly outcomes-based system.

Putnam: So tell us a little more about this story. How did TSTC come about to this outcomes-based funding model?

Reeser: So the conventional way of funding higher ed, that method that uses some sort of academic unit, the trouble with that is that those units are actually units of input or effort and not result. And you make that notion together with the fact that all organizations will organically align to the source of their resources. What you get in conventional method of funding higher ed is more and more activity, but not necessarily better outcomes for the students or for the state economy. It's why, for example, we see a growing problem with either unemployment or underemployment for many college graduates. It's because the institutions have a financial incentive to produce a lot of academic activity, but those processes are wholly blind to the employment outcome of the student after they leave the institution. Programs that don't have a firm link to an in-demand job in the marketplace actually prevail or persevere and students find themselves in a pathway that may not lead to a great job. In technical ed, because our core purpose is solely produced practitioners of technology, having an employment focus to begin with is a wholly natural sort of step for us and was a big part of the genesis of our new system.

Putnam: Michael, I'd love to hear from you. What are some of the challenges with how technical colleges traditionally and historically have been funded, and what's different about what TSTC is doing and how you're doing this outcomes-based funding?

Reeser: There was a legislative session some 12 years ago in which the Texas budget had tightened a bit. And the legislature was looking for ways to make funding more concise to the outcomes that they were seeking. So, they began asking institutions of higher ed, would you be interested in having some of your funding based on outcomes? Generally speaking, the reaction was positive, but when it came time to actually define how much of your funding would you subject to outcomes and not inputs, enthusiasm began to wane. But TSTC was different, and the reason is we had a 50-year history of putting people to work. And we knew that putting those people to work was indeed our mission. We were confident in saying, "Sure, we'd be glad to be funded by outcomes." And the journey began.

Putnam: Tell us a bit more about how that conversation progressed and how TSTC reacted to going big and shifting to this outcomes-based funding mechanism and not making this an incremental approach.

Reeser: Well, the way it began was during a live testimony in front of a Senate Finance Committee, back in 2007, the chairman of the committee asked institutions if they were interested in going to outcomes. And our response was, "Yes, we are." That's how it all began. But the way that the formula actually got developed took several years and many players. There was a bit of good luck in the whole thing, too. During the interim period after that legislative session when the dialogue began, we were tasked to sit down with our statewide Higher Education Coordinating Board, and then other players, including the Texas Workforce Commission, Workforce Center at UT-Austin, the Comptroller's Office, and other major players in Texas, and begin to imagine how would a wholly outcomes-based formula work for TSTC. There was a lot of chefs in that kitchen, but the outcome was actually quite good. The secret to our success in this is that no one lost track of the fact that our primary mission is to place skilled technicians with Texas employers. And with that as a start point, reverse engineering into the process that we ended up creating was actually fairly straightforward.

Putnam: I'd love to hear a little more about this model and how it works in practice.

Reeser: The conventional higher ed funding in Texas is based on two variables. There's an activity variable and there is a funding rate variable. And it's quite simply the number of activity units times the funding rate variable equals the funding. It's been that way for a long, long time. Our process is actually not very different than that. We too have two variables. The first is the employment outcome of the students times the funding rate, so it was quite easy for folks to imagine it. Now, the employment variable is defined as essentially a percent, the aggregated economic benefit received by the students from their first five years of employment. In a more simple way, we're paid a placement fee based on the employment vitality of the students after they leave their program at TSTC. If you were to do business with a placement service and have them find you talent, that placement fee would be exactly like the way we're paid when we put Texans to work in our economy.

Putnam: This seems like a huge change. I'd love to hear a little bit about how did that change TSTC culture? How did that play out in practice, the shift to being focused on the outcome for the student?

Reeser: The first point I want to make is the cultural change is the real benefit. Changing the way you're funded is not in and of itself any sort of benefit to the institution. You're just swapping one formula for another. It's the imperatives that a new formula creates on your internal culture where the real benefit lies. I'll give you a for instance. We know that organizations will align to where their resources come from. In the old formula, we went to extraordinary measures to maximize the number of credit hours that we would produce in a given term. Other than an obscure metric out in the hinterlands of data collection processes in the state, few people paid attention to the employment outcome of our students. It was those hours that drove our entire culture.

Today, it's completely different. What drives our entire culture is the notion that every single thing we do has to be aligned with preparing our students for great employment after they leave, and that to do anything other than that is actually a waste of time and resources because it doesn't contribute to the way in which we're funded. In fact, it detracts. Imagine the cultural shift that would be from maximizing your busy activities to maximizing the outputs that your students see. All of a sudden, return on investment, whether it's return on the time I spend every day on a task, the way I write curriculum, the pathways that students have through material, the way that we recruit students and the way that we place them, there isn't a function within the college that wasn't touched by this mind shift.

Putnam: Take us into the room for one of your internal planning meetings at the beginning of this transition. How do you overcome resistance or potential concerns and lay out the vision for this new idea?

Reeser: TSTC is different than the other schools in a lot of ways, a lot of ways. One of the first ways we're different is that we don't have conventional or traditional academic traditions, and academic traditions are valuable, and the benefits we see as a society that come out of the academy are based in part on those traditions. But one of the ways we depart is the executive team at TSTC didn't grow up making their way up through the ranks of the academy. Virtually all of us worked in business and then came to higher ed. If you start your career in a for-profit business, you have a sort of entrepreneurial mindset that that is your basis. That entrepreneurialism was brought to with the executive team that was assembled at TSTC.

Likewise, our board is selected by the governor and confirmed by the senate and they too tend to be dominated by successful businesspeople in Texas who volunteer their time for worthy service like our board. The notion of being paid by the value of our output was actually a comfortable notion to virtually everybody on the executive team and the board. It was those teammates who had spent a lot of time in government service and hadn't been exposed to the notion of performance-based value that it took some shifting gears for. But most everybody made a wonderful transition. Although, our transition that occurred under the new funding formula may seem a bit scary at first, particularly for faculty who were used to doing things the old way, what we found is once we got through the transition, faculty feel more empowered than ever to be in control of their programs because they know better than anyone how to make their programs efficient, effective, and germane to the employment needs of Texas industry. It puts them in the driver's seat.

Putnam: This massive shift that you're talking about, moving from investments and activities to really thinking about outcomes, it does generate investment, but it also requires some sacrifice. I'm curious, what were some of the sacrifices that really happened for you as an institution in transitioning to this new model?

Reeser: Conventionally, when a college decides to field a program, there are a few questions they ask themselves. The first one is, will students sign up for this program? That's the first thing you're naturally going to ask, because what good is a program that no student will follow? The next is, can you find the faculty? Can you find the resources to field it and so forth? A question that often isn't asked is, will the kids get a job once they graduate from this? But when we switched over, the first question we had to ask ourselves is, because that's how we get paid, will this program lead to a great job? After we made this switch, what we found is with that new question added to the mix, we had programs that weren't naturally yielding a great employment outcome for students. Eventually, what we had to do was phase those programs out. Phasing out a program at a college is usually a pretty traumatic event. It's something that is not often seen and certainly can contain a lot of heartache because it's like any company winding down a product line, but it was something that we were obligated to do because we knew when we went down that road and phased out some of the programs, we could take the recovered assets in the form of people, time, and resources, and reapply them to other areas that would provide a student with a really great job. That made us good stewards of the taxpayer money. It meant that the best interest of our college was now aligned with the best interest of the student who desires to get in, get through and get a job, and the benefit to the state is also an interest we align with because they want their money's worth when they fund a college.

Everybody's best interest aligned in that situation. There's the first example. The second example is, as we learn to do a better job of teaching students for a market-driven outcome, some of our programs or processes may be unnecessary in the long run. Or it may be we have to retool something to take advantage of new technologies, or new opportunities, or new industrial fields. Recently in the midst of the COVID pandemic, we had a layoff. Interestingly, our layoff was not driven by a budget concern because the truth is, we never really had a severe budget problem during the pandemic. What it was driven by was the need for us to recapture resources that were being spent in various ways, operational ways, and focus them instead on a new more efficient and effective way to help kids get through their program and into a job. For example, more online resources, more liberal use of video, online capabilities, a restructuring of the way our lab spaces work so that more students could be close to the gear that they're training on. All of that required new resources and so we phased out old and brought in new.

Putnam: You've talked about this a little before, but there's the theory of what you're trying to head for and what that actually means in the day-to-day practice. I'm wondering if you can talk about how these shifts trickled down in the regular activities and decisions you were making for TSTC?

Reeser: We have one program in particular that prior to our funding change had two exit points for students. There was a one-year certificate and a two-year associate degree. Now, the average starting salary for the one-year certificate was bumping along pretty consistently at about $72,000 a year. Imagine this, a 19-year old kid with one year of college was going out and getting $72,000 a year to start their career. This was a strong, in-demand field that the sky's the limit for folks in that field. The associate degree, which took twice as long, had an average starting salary of $78,000. The incremental return on that extra year was burdensome to the student because the employer didn't really care whether you had an associate or a one-year certificate. They were going to pay you nearly the same for both those credentials. But more importantly, when we eliminated the two-year option and went solely to the one, that was the same as doubling our capacity in the lab, doubling our number of faculty, and so forth because students were able to complete in half the time.

That's an example of how it was faculty themselves, who realized this epiphany, that in the old system, I defaulted to the associate degree because it kept the students here longer, and that's how we got paid our money. In the new system, I'm suggesting to them, you don't need a second year. You're already ready. Head out there and get to work. And we can serve more Texans that way. It wasn't leadership who pointed that fact out. It was faculty themselves who realized we can improve our output here by a significant amount and make one little tweak in the way we do business. Because of the funding formula, we realized quickly that the employers in Texas were every bit an important customer to us as the students who come and study. Because if our funding is based on placing those students into employers' workplace, we had to treat the employers like repeat customers. We had to ensure our quality was good. We had to ensure that they were delivered on time and in spec, and that that employer was so thrilled with the quality of the workers that we gave them, that they came back to get some more.

Putnam: One of the things from your chapter that really struck me was the development of this business intelligence unit. And I'm wondering if you can tell us a little bit more about how that's evolved and what are some of the decisions that it has informed?

Reeser: Our business intelligence unit is something we started early on and because there were just questions we couldn't answer. And one of the things we found was, despite the fact there were commercially available vendors that one could turn to, to get your questions answered, almost all of them catered to the academic notion of how you measure success. What we found is we had to build our own. We hired some really smart people, some data scientists and folks like that. And they have been building that unit since. We started with the most critical questions first, questions like, how vital is this program to the overall success of the college? One of the first things they did was they developed a program vitality scorecard, one in which the various features of a program that could be measured, regarding inputs and outputs, were measured. And we found both a visual and a numerical way to represent that scorecard. And then, we started publishing it so everyone could see.

That allowed faculty and program and staff to see each other from a comparative standpoint, but it also allows them a longitudinal look at how they're doing. We added to that business intelligence unit, essentially a consulting team made up of knowledgeable business veterans who knew how to fine tune operations for optimizing a return. We made them available to the faculty so as the faculty made that transition over to a more entrepreneurial mindset, they had someone they could ask, what do you see as my bottlenecks? How can I make things more efficient and more effective? And they had professionals to whom they could safely go and say, what are my weak spots and what are my strong points and get a good straight answer. The business intelligence and that business consulting are two key features that we installed to allow people to make the shift.

Putnam: I'm sure that other people have come to you asking about advice or your thoughts on applying this model. And I'm curious, what advice would you give to other institutions of higher education or other technical colleges that are thinking about how to apply this model?

Reeser: The first is, I think it's absolutely critical that if you look at an outcomes-based method of financing a higher ed institution, don't start at the end. Start at the beginning. You have to start with the mission of the college. You have to start with, why do we exist? Because if you want results-based funding, you're going to have to decide which results are we going to measure and find. And if you aren't careful, you'll measure things that aren't part of the initial mission of the institution. For us, our primary metric is putting skilled technicians to work in Texas. That's the primary one. So, that narrow focus allowed us to focus solely on employment outcomes.

But suppose I was a university where I have a much broader mission. I'm supposed to do research and create new information. I'm supposed to commercialize what I find. I'm supposed to practice scholarship. I am supposed to contribute to the well-being of our society through cultural influence. There are things that aren't tied solely to work that are part of their mission. What we found is we'll follow whatever the metrics are, so pick your metrics carefully and align them to the mission of the institution. I think another is give yourself time to make the transition. If you're going to go from a system that funds inputs to a system that funds outputs, there's a couple of things we learned. The first is calibrate the new system with the old. If you don't carefully do that, you could have a big lurch up or down in the funding for an institution. There has to be a way to transition safely from one to the other, because a spirit of panic is never going to be conducive to transitioning one's operations, at least in a peaceful way. Give yourself some time and calibrate to the old system.

And then, finally I'd say take great care in what you measure, because folks will... you know, that old saying: Folks respond to what's inspected as opposed to expected. And when you measure something, you are inspecting it. And so, I would say, watch out for that. Those are some of the things that I would say our lessons we've learned on this whole thing. Suppose we decided we were going to build a university from scratch or a college from scratch. Would we sit down and say, "I have a great idea. We're going to take everything and we're going to lump it into 15-week blocks. And we're going to make people come and look at this stuff on a Monday and Wednesday and Friday. And it's going to start on this day, and it's going to end on that day. And we're going to cram the content into that fixed schedule. And then we're going to measure it based on how many hours the student is face-to-face with the teacher. Is that really how we would design it, or would we look at it differently? Would we look at it the way, say, Socrates may have looked at it? And that is, "What's our goal here?" Our goal here's to exchange ideas in a beneficial manner. And all of that structure that we traditionally use in higher ed was created when we kept our books with ledger books and quill pens. It's as old-fashioned as anything I can imagine.

Learning doesn't work that way anymore. Look at the young people who teach themselves to play guitar, or fix a car, or whatever, by just watching a YouTube video. Look at the way that people do complex things, or make their way through school, by studying on Khan Academy. There is no need for us to have this rigid time-based system, and then make the learning part the moving variable. What TSTC is doing is, now that our funding is not tied to that time-based schedule, we are turning all of our teaching over into... We're making time the moving variable, and mastery of the material as the non-negotiable. This new system is going to allow us to convert the entire college experience into a competency-based, project-based, time-fluid process that will allow students to learn using their natural curiosity, and their desire for a great job as their main driver. It could never happen if we were still paid based on the calendar and the clock. That's what I see in the future, is by funding the outcome and not the means, you leave creative people with the opportunity to rethink the means of doing college.

Putnam: We've talked about how this evolved. What does the future look like for TSTC, and particularly in regard to this shift to this outcomes-based mindset, and what that means for the future of the institution?

Reeser: In terms of workforce preparation of the future, I think the first thing we have to come to accept is the fact that it's not about college credentials. That is not at all what employers truly seek. What they seek is skills. That's what they seek. And the conventional notion of college is so bound in its semesters, and classes, and tightly wound learning outcomes, that it's troublesome for education to think in a smaller nugget, like a skill. College will transform when we begin to realize that it's about skills and not credentials. There are some great new opportunities made available by technologies that are able to bridge the gap between the way corporations define skills, and colleges are able to build those skills within their students. Those are going to give us opportunities to make this transition. I read an article recently that one of the Big Six accounting firms, their branch over in London recently eliminated an accounting degree as one of the requirements to work in this accounting firm. What they replaced it with was proven expertise in this field of accounting. People who may have say had 20 years of experience as a manager, but never had an accounting degree, would qualify for those. That's an example of how we're seeing... I'll tell you another one is the new certificate programs that have been fielded by the major players out of Silicon Valley. Google, for example, has now fielded a brand-new certificate program where you can go and study six months or less, and earn the same amount of money as a bachelor's degree in computer science. Because you have the germane skills that they are actually seeking. The rest is fluff, but you get fluff when your state funding pays for fluff.

Putnam: Thank you for joining us for our fourth episode of Workforce Realigned, where we heard how Texas State Technical College is using higher education dollars to innovate around workforce outcomes, improving outcomes for their students, and for the regional economy. In our fifth and final episode of Workforce Realigned, we'll learn about another innovative model called Career Impact Bonds that are achieving better outcomes for their students in training programs like General Assembly, and the American Diesel Training Centers. We hope you'll join us for our next episode. If you'd like to learn more about innovative case studies happening across the country, you can visit workforcerealigned.org.Off-site link. I'm Ashley Putnam, and it's been a pleasure to be your host.