Rich in Cash and Prestige, UNext Struggles in Its Search for Sales

Provider of online business courses cuts costs and expands its offerings to try to find its niche

By SARAH CARR

Don't look for Foosball tables and beanbag chairs in the offices of UNext,

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the high-profile company that sells online business courses to corporate customers.

Like the decor of its executive offices, where Robert Mapplethorpe photographs line a hallway, UNext is sophisticated, an apparently A-list success story at a time of crumbling dot-coms and struggling distance-education companies.

UNext has had little trouble attracting the investors it needs to support its operations, recently completing a third round of financing at what one analyst calls "some astronomical price."

And its partners include a few of the world's most prestigious universities, which have helped UNext develop some of the best online-learning products available. That quality has helped the company win some major deals, including a new multimillion-dollar contract to offer courses to General Motors employees.

Still, UNext has not evaded the affliction of the dot-coms altogether, and its fortunes remain unpredictable. In the last few months, the company has laid off 52 of its nearly 400 employees. And adding to the ambiguities is the fact that no one seems to know whether UNext will ever make any money.

"Whether they can pull this off is a hard question," says Gregory A. Jackson, the chief information officer at the University of Chicago, which works closely with UNext. "They can afford to tackle this challenge for longer than their competitors, but they are burning capital at a really rapid rate."

The company recently has begun expanding its offerings in many directions to try to find and tap the ripest markets.

Its challenges highlight the fact that even the most heavily financed and well-conceived online-learning ventures are likely to hit roadblocks when it comes to identifying the best customers and making quick sales.

Since its founding in 1997, UNext has attracted considerable publicity, partly because of its close ties to the financier Michael Milken, whose Knowledge Universe organization provided most of the seed money for the company, which is still privately held.

The fame of UNext's academic partners has also brought it publicity. The partners are Carnegie Mellon, Columbia, and Stanford Universities, along with the University of Chicago and the London School of Economics and Political Science.

The prestigious connections come at a cost, however. In securing the partnerships and developing its courses and software platform, UNext has burned through more than $120-million.

"This is a very expensive undertaking," says Richard P. Strubel, UNext's president and chief operating officer. "And the whole business model depends on making a huge up-front investment rather than a business-to-consumer model of selling individual courses. I don't know that anyone will ever do it again, and they certainly won't do it the way that we did it."

Mr. Strubel says the costs of creating a UNext course -- one of the company's biggest expenses -- have dropped considerably over the last year, but the company still sometimes pays as much as $700,000 to create the equivalent of a full-semester course.

UNext offers two basic types of courses. The longer, more extensive ones are taken by students hoping to earn an M.B.A. through Cardean University, a UNext subsidiary. Although UNext has many competitors for its M.B.A., including the online Jones International University, most of them are part of long-established universities or companies.

UNext's shorter courses typically take only a few hours to complete -- and are not taken for credit toward a Cardean degree. Both types of courses are grouped into "suites" of four courses each.

Examples of the suites for the M.B.A. include "Data Mining," "Managing Innovation," and "Financial Accounting"; suites of shorter courses include "Learn to Speak Accounting," "Shakespeare's Lessons for Business Leaders," and "Understanding Internet Technology." A master's-degree course takes, on average, about six weeks and is based on what UNext bills as a problem-centered approach, in which students are confronted with real-world business scenarios.

All UNext courses are broken into a series of tasks, each with a specific objective for the student. All the courses include interaction with other students and UNext instructors, through e-mail messages and on discussion boards, as well as a variety of multimedia features. A lesson might be interrupted by a short animation that elaborates on a given topic, for instance.

UNext has an unusually extensive system for evaluating its offerings. Almost every day, the company pays people to come to its offices and test its courses. As they progress through them, UNext officials watch the testers via dozens of television screens.

Although UNext has developed more courses for its master's degree, officials at the company say they plan to focus on the shorter courses now that they have created a full M.B.A. curriculum. "The greatest demand is not for the degree program in the corporate marketplace," says Geoffrey M. Cox, the vice president of academic affairs and continuing education at UNext, who recently left a job as a vice provost at Stanford to join the company. "And we don't know yet whether individuals will seek online M.B.A.'s."

Mr. Strubel says the largest expenses in the course-development process are labor and payments to UNext's partner universities. "We have no raw materials that we pay for, except if we happen to need copyrighted material. There are really no other outside expenses." He describes the creation of courses as "highly people-intensive," and says UNext has hired teams of editors, cognitive scientists, and technicians to assemble the courses.

Several professors at UNext's partner institutions say their involvement in the development process has been primarily at the outline level.

Raghuram G. Rajan, a professor of finance at the University of Chicago who worked with UNext to create a course in corporate finance, says he sat down with representatives from the company and went over the different points he wanted to get across. "Then they went away and filled in the details," Mr. Rajan said. After the course was completed, Mr. Rajan had the right to review it and request changes. UNext's Web page states that the course was "developed with" Mr. Rajan.

He likens the process to writing a book. "It has caused me to think about how my philosophy of teaching would change if I wasn't allowed much personal contact, but had to solely rely on visuals and other media."

Adds Joel M. Podolny, senior associate dean for academic affairs at Stanford's business school: "You are really sending the courses out into the ether. Even if there is a facilitator, the facilitation is going on without you." The company hires instructors -- who have at least a master's degree, not necessarily in business, but may not have teaching experience -- to interact with the students during the master's-level courses.

The professors who help develop the courses do not have contracts with UNext, but instead make individual arrangements with their institutions about compensation for their participation. None of the universities have invested in UNext, although they do have the opportunity to convert part of their compensation into an equity stake in the company after it goes public.

At least one of the universities was recently given the option to invest in UNext. "We have such an option, but we have not made any investments," says Michael M. Crow, Columbia's executive vice provost. "We have given course content, and that is it." Administrators at the universities estimate that their individual contracts with UNext are each worth about $20-million, although each is structured slightly differently. No one at any of the universities would describe details.

Richard A. Epstein, the chairman of the committee at Chicago that negotiated with UNext, says that while he thinks the deal has worked out well, such collaborations carry potential dangers as well as benefits. Mr. Epstein says that if the company thrives, the university's reputation is bolstered and the university's faculty members and students gain access to new technologies.

"That is all if the deal works out," he says. "If it goes badly, it is bad for all the same reasons. Alumni are upset, students are upset, faculty are outraged, and everybody has egg on their face."

Frank Newman, a former president of the Education Commission of the States who teaches public policy at Brown and Columbia Universities, says institutions often underestimate the possibility of harm to their reputation when working with commercial companies. He says he thinks UNext officials are "pretty straightforward, but the academic community is not asking enough questions."

"When you talk to the people at UNext, it becomes clear that what they would like to do is build the Cardean brand," he says. "When they have done that, the value to them of the other brands will diminish steadily. They are clearly not out there to build the brand of Stanford or Carnegie Mellon."

Mr. Newman says he wonders if the universities "are undercutting the development of global recognition when -- in the business world -- they are behind the screen of Cardean."

Several administrators and professors counter that they are free to pursue their own online efforts while reaping the benefits of working with UNext. "I don't really think there are significant risks in our view, since the university can still do distance education itself," says Walter DeForest, a lawyer for Carnegie Mellon. "We believe that we have the appropriate control over the quality issues."

Adds Sam Steinhardt, the chief financial officer of learning technology at Stanford: "There is a lot of upside and not a whole lot of downside."

"I'm not sure if I would characterize this as having that much risk for Stanford," he says. "I think everyone understands that UNext is a separate company and is run by a management team, and that Stanford University doesn't have any role in governing how it works. So if it were to fail, that doesn't really say anything about us."

Given the absence of a consensus on UNext's prospects, this may be a healthy attitude.

"The first challenge was to figure out how we could make the relationship work in a legal sense," says Mr. Jackson, at the University of Chicago. "No. 2, we had to see if the collaboration would happen. And the third challenge was to figure out if we could produce high-quality instruction. But the fourth question is whether UNext can make any money, and I think No. 4 is the real question mark."

Building an online institution from scratch has proven to be something of a guessing game.

"I think there is definitely a market for an executive business program," says Mr. Newman. "But whether UNext has the right format is another matter entirely. I'm a little skeptical at the moment, although I think they are very smart people."

He says he believes that the most successful online ventures in higher education have been built piece by piece. "The best ones haven't come out and said, 'There is going to be a whole new world, and we are going to build a huge new effort.' The Cardean strategy is really the way a lot of people got into the dot-com business."

Mr. Jackson adds that UNext's original plan of selling blocks of courses to large corporations has not panned out as its officials originally hoped. "They have had real trouble finding major buyers like that, and have had to augment by finding smaller buyers as well."

UNext officials point out that they have made several major sales, including the most recent one to General Motors, as well as to such companies as Barclay's Capital, AOL Time Warner, and Singapore Technologies.

"We'll make it," says Mr. Strubel. He adds that UNext -- like any company -- has run up against some surprises and challenges. "There might have been other, safer businesses to go into."

Mr. Strubel says the sales cycle has been "more protracted" than was anticipated, since it takes several months for a company to vet UNext's proposal and then put its workers through trial courses.

Moreover, the most likely potential customers to pursue were "not totally obvious," Mr. Strubel says. He had thought, for instance, that investment-banking companies would be more interested in the UNext courses.

This year, UNext's leaders have been trying to create as many potential sources of income as possible by expanding beyond their initial model of selling business courses to corporations -- although they contend that the expansion has always been part of their long-term business plan.

They have started selling their courses to universities in addition to corporations and individuals. One Stanford professor has even licensed back a course he helped UNext produce for use in his own courses.

UNext also hopes to start a program called Get To Work, through which college students approaching the end of their undergraduate careers could take a course introducing them to basic business concepts. The program, which would cost students about $1,000, would be aimed at liberal-arts students unfamiliar with the job-search process in business. UNext plans to work with a career site on the Web to market Get To Work, and to send mailings to college career centers.

Some university officials talk about eventually paying to use UNext's team of course graders, or purchasing just one segment of the company's services. And UNext has already started to offer broader consulting services to some corporations, advising them on their employee-training practices.

"We can take what we have already done and by mixing and matching we are creating something for a new audience," says Alan Drimmer, managing director of UNext consulting services.

But which precise mixture will be the easiest sell is an open question. "I don't think many people know what it will take to dominate the market for online education," says Mr. Steinhardt of Stanford. "A lot of the game will be who has the most staying power financially."

		A UNEXT COURSE: SHAKESPEARE FOR BUSINESS LEADERS This animation depicts a scene in Hamlet in which the protagonist agonizes over whether or not to kill Claudius, who had murdered Hamlet's father. The scene is used to illustrate the difficulty of making decisions and then carrying them out. TITLE: "Shakespeare's Lessons for Business Leaders" CONTENT: The course suite uses speeches and animated scenes from Shakespeare's plays to teach students about such leadership topics as instilling trust in employees and making effective decisions. The suite includes such courses as "The Perils of Promotion" and "Trust and Loyalty." REQUIREMENTS: Students must complete exercises answering questions about real-life situations they might encounter in the workplace. They then compare their decisions to those made by Shakespeare's characters in comparable situations. LENGTH: The course suite, which includes four lessons, should take less than 10 hours to complete. CREDIT: The course is not for credit, and course work is judged as either complete or incomplete by teaching assistants. TUITION: $380 SOURCE: Chronicle reporting

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