Kuali For-Profit: Change is an indicator of bigger issues

On Friday the Kuali Foundation announced the creation of a new for-profit entity to be led by the former CTO of Instructure, Joel Dehlin. Jeff Young at the Chronicle described the change:

Ten years ago, a group of universities started a collaborative software project touted as an alternative to commercial software companies, which were criticized as too costly. On Friday the project’s leaders made a surprising announcement: that it would essentially become a commercial entity. [snip]

The Kuali Foundation will continue to exist as a non-profit, but it will be an investor in a new commercial entity to back the Kuali software development. Leaders insisted that they would maintain the values of the project despite creating the kind of organization that they once criticized. For one thing, the source software will remain free and open, but the company will sell services, like software hosting. On Friday the group issued an FAQ with details about the change.

As Carl Straumsheim put it at Inside Higher Ed:

The Kuali Foundation, after a decade of fighting commercial software vendors as a community source initiative, will launch a commercial company to better fight… commercial software vendors.

Despite the positioning that this change is about innovating into the next decade, there is much more to this change than might be apparent on the surface. The creation of a for-profit entity to “lead the development and ongoing support” and to enable “an additional path for investment to accelerate existing and create new Kuali products“ fundamentally moves Kuali away from the community source model. Member institutions will no longer have voting rights for Kuali projects but will instead be able to “sit on customer councils and will give feedback about design and priority”. Given such a transformative change to the underlying model, there are some big questions to address.

Financial Needs

Kuali, being a non-profit foundation, has its financial records available online, and the tax reporting form 990s are easily obtained through sites such as GuideStar. Furthermore, instructional media + magic (im+m) has a public eLibrary where they have shared Kuali documentation over the years.1 There does not appear to be a smoking gun found in the financials to directly explain the need for such a significant change, but there are hints of issues that provide some insight. In a recent analysis of Kuali’s financials from these public sources, im+m noted how Kuali has reserves to survive between 8 – 34 months with no additional income, depending on the percentage of uncollectible accounts receivables.

In an article in the Chronicle this past spring, Kuali leaders described their apparent financial strength.

The foundation is in the best financial shape it has ever been, its officials say. Membership dues for small colleges start at a few thousand dollars; some big institutions contribute up to seven figures for specific software projects.

“We are about a $30-million net-asset organization,” says Ms. Foutty, the executive director. “There is not a concern that we are going to lack cash flow or net assets to do what we want to do.”

But what comprises these net assets? It turns out that the vast majority is comprised of accounts receivable, and more specifically, committed in-kind contribution of project resources from member institutions on the various projects. By looking at the financial report from last year (ended June 30, 2013 – see p. 3), we can see that Kuali had net assets of $26.4 million of which $21.3 million were “contributions receivable”. I would assume that current assets have approximately the same ratios.

What this means is that a foundation such as Kuali is more dependent on member institutions keeping the faith and honoring contribution commitments than they are on pure dues and hard cash. Kuali cannot afford for too many institutions to to pull out of the consortium and write-off their commitments, and this aspect is based on whether Kuali will deliver the products that the institutions need.

Timing

According to the Kuali web site, the addition of a for-profit entity was based on two community strategy meetings that were held June 25-26 and July 30-31 of this year. Brad Wheeler, chair of the Kuali Foundation and CIO at Indiana University, wrote his summary of the meetings on Aug 1, 2014, including these two prophetic notes:

• We need to accelerate completion of our full suite of Kuali software applications, and to do so we need access to substantially more capital than we have secured to date to meet this need of colleges and universities.
• Kuali should consider any applicable insights from a new breed of “professional open source” firms (ex. RedHat, MySQL, Instructure) that are succeeding in blending commercial, open source, and foundation models. This should include consideration of possibly creating a commercial arm of the Kuali community.

There were also direct notes about the need for cloud services and better project coordination and decision-making.

The changes announced on Friday come less than two months after the first community strategy meeting, so I have trouble seeing the meetings as the cause and the Friday changes as the effect. There is reason to believe that the changes have been in the works prior to June of this year.

Change as an Indicator

When Kuali makes this radical of a change (moving away from community source model) within this short of a timeframe (less than two months), I think the best way to view the change is as an indicator that there are bigger issues under the surface. I wrote in a post on Unizin about a key question about the community source model:

Community source has proven its ability to develop viable solutions for known product categories and generally based on existing solutions – consider Sakai as an LMS (heavily based on U Michigan’s CHEF implementation and to a lesser degree on Indiana University’s OnCourse), Kuali Financial System (based directly on IU’s financial system), and Kuali Coeus (based on MIT’s research administration system). When you get rid of a pre-existing solution, the results are less promising. Kuali Student, based on a known product category but designed from the ground up, is currently on track to take almost 8 years from concept to full functionality. Looking further, are there any examples where a new product in an ill-defined product category has successfully been developed in a community source model?

Kent Brooks, CIO of Casper College, wrote a post this morning and called out a critical aspect of why this challenge is so important.

My overall observation is that the 10 year old Kuali project seems to have hit a bit of a lull in new adoptions. Partly is because institutions such as mine provide the next ‘wave of growth’ potential and most are unwilling to listen to the Kuali talk when there is not a Kuali Walk…aka a complete suite of tools with which one can operate the entire institution. It is a deal breaker for the 4000ish small to mid sized institutions in the US alone.

In other words, the vision of Kuali requires the availability of Kuali Student in particular, but also for HR / Payroll. Both of these project are based on future promises. I strongly suspect that the lack of completion of a complete suite of tools that Kent mentions is the real driving issue here for the changes.

Kuali must have new investment in order to complete its suite of applications is the vehicle that the Foundation needs to raise the capital. One model that certainly informs this approach is ANGEL Learning, a for-profit entity which was founded and partially owned by the non-profit Indiana University (IU). ANGEL was able to raise additional investment beyond IU, and when ANGEL was sold for $100 million in 2009, IU made approximately $23 million in proceeds from the sale.

Required Change

Although there is a lot still to learn, my view is that the creation of a for-profit entity is not just a choice for acceleration into the next decade but is a change that the Kuali Foundation feels is required. Kuali can no longer bet that the community source model as currently implemented can successfully complete new products not based on pre-existing university applications, and they cannot rely on the current model to attract sufficient investment to finish the job.

Brad Wheeler was quoted at Inside Higher Education summarizing the changes.

“What we’re really doing is gathering the good things a .com can do: stronger means of making decisions, looking broadly at the needs of higher education and maybe sharpening product offerings a bit more,” Wheeler said. “This is going to be a very values-based organization with patient capital, not venture capital.”

The foundation will fund the launch, Wheeler said. For future funding, the company won’t pursue venture capital or private equity, but money from “values-based investors” such as university foundations. That means Kuali won’t need to be run like a traditional ed-tech startup, he said, as the company won’t be “beholden to Wall Street.”

In a post from this afternoon, Chris Coppola from rSmart (a co-founder of Kuali) provided his summary:

The Kuali mission is unwavering, to drive down the cost of administration for colleges and universities to keep more money focused on the core teaching and research mission. Our (the Kuali community) mission hasn’t changed, but the ability to execute on it has improved dramatically. The former structure made it too difficult for colleges and universities to engage and benefit from Kuali’s work. This new model will simplify how institutions can engage. The former structure breeds a lot of duplicative (and even competitive) work. The new structure will be more efficient.

More to Come

There is a lot of news to unpack here, and Michael and I will report and provide analysis as we learn more. For now, there are some big questions to consider:

1. If you read the rest of Kent Brooks’ blog, you’ll see that he is now delaying the decision for his school to join the Kuali community. How many other schools will rethink their membership in Kuali based on the new model? The Kuali FAQ acknowledges that they will lose members but also predicts they will gain new membership. Will this prediction prove to be accurate?
2. More importantly, are there already current member institutions providing significant resources that are threatening to pull out of Kuali?
3. Given the central need for new, significant investment, will Kuali and the new for-profit entity succeed in bringing in this investment?
4. Will the new entity directly address the project challenges and complete the full suite of applications that is needed by the Kuali community?
5. What effect will Kuali’s changes have on other community source initiatives such as Sakai / Apereo and Unizin (if it does get into software development)?

Update 8/26: Clarified language on voting rights from ‘customers’ to ‘member institutions’; added qualified in last question re. Unizin (it would only be community source if it gets into software development).