The Costs and Costing of Distance/Open Education
Greville Rumble

Context:
One of several selections from this paper in the database, this section focuses on the cost-effectiveness of distance education.

Source:
Rumble, Greville. 1988. "The Costs and Costing of Distance/Open Education." In J. Jenkins, ed., Commonwealth Co-operation in Open Learning: Background Papers. London: Commonwealth Secretariat, pp. 255-58, 264-66.

Copyright:
Reproduced with permission.

The Costs and Costing of Distance/Open Education

3.4 While comparative data on the relative cost of particular media is still scarce, there is plenty of evidence that distance education can be more cost-effective than traditional education.

3.5 The basic cost function of distance education is explained in Appendix 1. Broadly speaking, this function is:

T=S[pi]+Cµ+F

where T is the total costs, S is the number of students, C is the number of courses or volume of materials, [pi] is the unit cost per student, µ is the unit cost of the courses or materials, and F is the fixed costs.

3.6 Those planning a distance education system in the hope that they will reap economies of scale must ensure that:

• the variable cost per student is less than that found in conventional systems operating at a similar education level
  
  
• the number of students S is large enough to bring down the average cost per student to a level where it is lower than the average cost found in conventional educational systems. The average cost per student (AC) is found by using the formula:
  

  AC =			+ [pi]
  	Cµ + F
  	S

• drop out rate is kept at a reasonably low level.
  
  
• the number of courses or volume of materials C does not grow so large as to increase the value of (Cµ + F) to a level where it becomes difficult, given the likely volume of students (S), for the average cost per student (AC) down to a level that is 'competitive' with the average cost per student in conventional educational systems.

3.7 These conditions have very significant implications for:

• the choice of media. In theory distance educators have a wide choice available to them. In practice this is often constrained not only by the absolute costs of a particular medium but by the effect its adoption may have on average student costs.
  
  
• market research—aimed at ensuring that sufficient students will be attracted to particular programmes at the institution to enable economies of scale to be achieved.
  
  
• the resources put into student services. Since these costs are a student variable cost, the degree of investment in student support services has to be weighed against the effect on the average cost per student (AC) and on drop-out rates.
  
  
• the resources put into the central infrastructure (fixed costs of the institution) are too large relative to student numbers.

3.8 The concept of cost-effectiveness needs to be distinguished from that of cost-efficiency.

Effectiveness is concerned with outputs: an organisation is effective to the extent that it produces outputs that are relevant to the needs and demands of its clients. It is cost-effective if its outputs are relevant to the needs and demands of clients and cost less than the outputs of other institutions that meet this criteria. This implies the existence of criterion for the measurement of effectiveness.

Efficiency is concerned with the cost of achieving outputs: an organisation is efficient relative to another programme if its output costs less (per unit) than that of the other institution. It becomes more efficient to the extent that it maintains outputs with a less than proportionate increase in inputs.

Organisations can be effective but not necessarily efficient. For example, one can teach Russian to Italians very effectively (i.e. they learn to speak Russian like a native), but if the cost per student of doing this is five times the costs incurred by anyone else, then one is not doing it very efficiently.

An organisation may also appear to be more efficient than another one (i.e. its unit costs are lower) but the extent to which it is really efficient must depend on its effectiveness. The single-minded pursuit of efficiency (ie. cost-cutting) may damage the effectiveness of an organisation, thus diminishing its cost-effectiveness.

3.9 The fact that an organisation is cost-efficient in comparison with another does not necessarily mean that it is as cost-efficient as it could be. There may well be internal diseconomies which could be rectified without damaging its effectiveness.

3.10 Distance and open education systems are not always more cost-effective than conventional educational institutions. Some of the major factors which may make distance or open education institutions less cost-effective than traditional ones are mentioned in paragraph 3.6.

3.11 It is important to point out that what is not being compared is the absolute cost of different systems. Distance education requires considerable investment before a single student can be enrolled—in both the development and production of course materials and the design and implementation of an institution's infrastructure. Thus Wagner (1977 : 360) pointed out that the ratio of fixed to variable course costs in conventional British universities was 8:1 whereas in the British Open University it was 2000:1. What is cheaper in distance education is the cost per student. What is compared is the average cost per student, full-time equivalent student, or student credit hour.

3.12 In summary, a distance system may cost more in absolute terms than the conventional systems with which it is being compared, but it can be more cost-efficient because it has sufficient students to bring the average cost per student down below that of conventional systems—thus making it more cost-effective.

3.13 Perraton (1982 : 21–35) shows:

• that at the primary basic education level, some distance teaching systems with even quite small numbers of students (eg. Radioprimaria, Mexico with 2,800 pupils) had lower average costs than conventional schools, and students achieved comparable scores. Other systems with large student numbers (eg. ACPO, Colombia with 70000 pupils) were also cheaper. However, in the Ivory Coast the primary educational tv system had a higher average student cost than conventional systems, even though it had 23 1000 enrolments annually. (The cost of setting up a tv network and of paying teachers salaries near to those of regular teachers meant that even with its large student numbers the Ivory Coast ETV system could not bring the average cost per student down.)
  
  
• at the secondary level, where there are more systems, some distance education systems (such as the Correspondence Course Unit, Kenya with from 340 to 2900 students each year) were more expensive than traditional systems. The Malawi Correspondence College (with 3800 students) had a cost per successful student that was more expensive than that of day schools but cheaper than that of boarding schools, while the National Extension College, UK, were cheaper than full-time classes and probably cheaper than evening classes. Yet other systems (eg. Tevec in Canada with 25000 students) were said to be cheaper than the in-school alternative.
  
  
• at the tertiary level, the British Open University is probably the best studied of all distance education systems. The cost per graduate at the Open University (which has an annual enrolment of 20000–25000) is about half the cost of a graduate at a conventional university, while the cost per student per year is about one third that of a student in a conventional university. The relative advantage of the Open University is less when comparing the cost per graduate because it has a higher drop-out rate than conventional UK universities. The costs at Athabasca University, Canada (with an annual enrolment of 4400) is comparable to that found in conventional universities in Alberta. These costs are for universities designed to teach only at a distance. Universities which run distance education programmes 'pick-a-back' on conventional programmes can expand their student numbers for relatively modest costs per student by teaching the additional students at a distance.
  
  
• in non-formal education, it is much less easy to draw comparisons between the costs of distance and conventional educational methods, not least because non-formal education does not lend itself to traditional methods of teaching what can be said is that where distance methods are used in large scale projects the unit costs are low.

3.14 Thus distance teaching can be cheaper than conventional methods, but this is not invariably the case. It is clear that achievement of high student numbers has a major impact on whether or not average costs per student are bought down to a level at which distance education is an attractive proposition. It is equally clear that distance systems have a high absolute cost and that it is cheaper to use conventional methods where student numbers are restricted. At which point a distance teaching system becomes cheaper per student than a conventional one depends on answers to the issues addressed in paragraph 3.7 above.

3.15 Two final points need to be made. Firstly, even though distance education can reap economies of scale, and even if the level of potential demand is such that one can envisage large numbers of students enrolling in a system, it is possible that the total cost will be such that a particular government or funding agency cannot contemplate starting to develop the system. Secondly, achieving a lower average cost per student may be economically and financially desirable, but it is a secondary objective. What is important is to teach students who perhaps cannot contemplate studying by other than distance or open means. The fact that certain students (eg. adults in full-time employment living in remote areas) can only be reached by distance means is in itself an important consideration in deciding to teach at a distance, and the comparative cost of doing this may be deemed irrelevant to the decision to establish a programme.

3.16 Most distance and open education systems exist as autonomous institutions in their own right. No publicly available cost studies of collaborative projects operating at an international level (although such projects exist—eg. University of the South Pacific) or intranational level (eg. Universitá a Distanza, Italy; DIFF, German Federal Republic) have been identified. However, there is a cost associated with collaboration, and collaborative schemes may well incur costs which are not encountered in 'stand alone' schemes.

Appendix 1

Economic studies of education costs

1. The majority of cost studies of distance and open education projects have been based on approaches derived from the discipline of economics. Such studies generally
   
   
   • identify the fundamental variables involved in the institution, project or activity that is the subject of the study. Variables may include
     
     
     • student load (based on head counts, full-time student equivalents, or some other appropriate measure of load)
       
       
     • either course loads (based on credits, credit hours, or some other measure of load) or materials (number of textbooks, television programmes, etc.)
       
       
   • identify the costs associated with the particular variables that have been identified, with a view to deriving an average unit cost per variable (eg. unit cost of one FTE student, unit cost of one television programme). Such costs are usually held to be the direct costs of that variable. A direct cost is a cost that can be directly attributed to an activity or variable.
     
     
   • identify those costs which are unrelated to defined variables. These costs are usually described as overheads. Such costs are usually called indirect costs. Indirect costs are costs that cannot be clearly related to an activity.
     
     
2. The studies then seek to show how total costs will change given a change in the volume of the fundamental variables within the system. Generally, it is assumed that the overhead costs are 'fixed' although this assumption is usually subject to caveats:
   
   
   • in the case of 'young' institutions that are still developing there is a reasonable expectation that overhead costs will rise. Economic studies of Athabasca University by Snowden and Daniel (1980) and of the Universidad Estatal a Distancia by Rumble (1981) attempted to meet this point by assuming that overhead costs would continue to rise for several years during the initial years of development
     
     
   • even for established institutions, overheads are usually held to be 'fixed' within a range of levels of activities, as reflected by the value of the fundamental variables. For example, it may be held that there will be no change in overhead costs while student numbers are in the range 60,000–80,000, but that above this level some additional overhead costs may be expected to occur.
     
     
3. Typically then, an economic study will derive a series of simple cost functions of the following kind:
   
   

   T = S[pi] + Cµ + F

   where T is the total cost of the project, S and C are variables (for example, students and courses or course materials respectively), [pi] and µ are the average unit costs of S and C respectively, and F is the overhead cost. T, [pi], µ, and F are expressed in money terms, S and C in volume terms. There may be more than two variables built into cost function. When comparing the costs of two or more projects or of two or more policy options, two measures are generally of importance. The first is the total cost (T) of the project or policy. The other measure usually adopted is to derive an average cost per student or participant in the educational programme. The average cost per student (A) is equal to the total cost (T) divided by the number of students (S)

   A = T/S

4. It is obvious that as the number of students (S) increases, so the total student-related cost (S[pi]) will increase. However, a sizeable proportion of the costs of distance education project are unrelated to student number (ie. Cµ + F) so that, while increases in student numbers adds to total expenditure (T), average costs per student (A) fall. 'Economies of scale' are achieved quickly at first, but once high volumes are achieved, further economics of scale are at the margin (see Appendix 1, figure 1).
   
   
5. Economic studies have their value in the sense that they
   
   
   • identify the fundamental (most important) variables affecting costs in distance and open education
     
     
   • demonstrate in simple terms the cost structure of distance and open education
     
     
   • assuming that the variables are identified in sufficient detail, enable broad conclusions to be drawn in respect of the cost structure of different media.
     
     
   • provide a basis for deriving average costs per student or some equivalent measure (eg. average cost per graduate, average cost per student credit hours, etc.) which can be used to make comparisons between systems, institutions, projects and policy options
     
     
   • provide a basis for deriving average costs per one hour's instruction, by media.
     
     
6. The virtue of economic studies lies in their simplicity. They can be used for 'propaganda' purposes by the institution to demonstrate:
   
   
   • the extent to which a particular distance or open education system is more cost-efficient (ie. has a lower average cost per student or graduate) than another system
     
     
   • to show how expansion of student numbers will enable economies of scale to be reaped.
     
     
7. On the other hand, economic studies of distance and open education projects generally identify a limited number of variables. The unit costs are average costs, derived by analysing the budget or accounts for a given year, and assigning costs to the variables in the model or to overheads. The total costs assigned to a variable are then divided by the number of units of that variable to give a unit cost per variable. Generally the models
   
   
   • do not specify the fundamental variables which affect costs in sufficient detail to be of practical value to the people who are trying to prepare an operating budget for an institution (Rumble, Neil and Tout, 1981:235)
     
     
   • depend for their validity on a range of judgements about the allocation of costs to variables (Rumble 1986 b: 4)
     
     
   • can seriously obscure the very wide range of costs found in individual to programmes (Rumble, 1986 b: 5)
     
     
   • while they can demonstrate external cost-efficiency (ie. this system is more cost-efficient than that one), they are useless as a means of demonstrating internal cost-efficiency (ie. this system is as cost-efficient as it can be without impairing its effectiveness).