Filling their boots? The rationale for growing loss-making home student numbers

The release of provider-level end of cycle data for the 2024 cycle confirms what has been long known informally; this year a group of “higher-tariff” providers went for growth, in some cases by reducing their entry tariff significantly. You can see DK’s crunching of the provider data here.

Typically, behaviour like this leads to grumbling elsewhere in the sector. That’s partly because there’s a direct impact on other institutions’ bottom line when the big players flex in this way, meaning that those who lose out may need to suspend planned investment and/or embark on portfolio rationalisation, rounds of voluntary redundancy, and other cost-reduction measures to stay afloat.

But it’s also because there’s a perception that the selective institutions are pulling in students that mid or lower tariff institutions consider themselves to be best equipped to support and nurture. This (arguably) creates additional risk for the students who find themselves studying at an institution that culturally may assume a greater degree of academic self-efficacy than they actually have.

The debate rumbles on as to whether it’s reasonable to “permit” popular institutions to grow at the expense of others. But much less attention is generally given to the question of why any successful provider with significant overheads would seek to grow home student recruitment at all. In 2022 the Russell Group warned that the average deficit incurred by English universities per home student per year was £1,750 per student per year, and that a “conservative estimate” would see that deficit increasing to £4000 by the current academic year.

Assuming you’re not an economist or a strategy consultant (if you are, do write in), you might legitimately be scratching your head about the strategic intent behind increasing sales of a product you don’t make any money on – indeed, that you have to subsidise from other sources. Higher education institutions don’t have to make money of course – the goal is generally to realise a small surplus across the breadth of activities, recognising that some degree of cross-subsidy, primarily from international student income, is part of the business model. But even with that caveat, growth of a loss-making activity in times of financial pressure remains, on the face of it, a peculiar approach.

What’s going on?

There are three strategic rationales for this that I can think of. It might be that hitherto high tariff institutions are growing for public interest reasons – to meet their access and participation targets, or because they are offering new courses of value to their regions or that will attract a wider range of international students or even support a particular research ambition.

It might be that they are growing in the subject areas that are cheaper to teach in hopes of making inroads into that average deficit and reducing the level of cross-subsidy from other sources. Over on DK’s end of cycle data visualisations you can take a look at the general subject areas where particular institutions have seen growth. DK would no doubt be the first to tell you that HECoS subject grouping isn’t quite as nuanced as you’d need to be able to make that case plausibly, though there’s probably a bit of it going on. This was a concern the Augar review flagged back in 2019 – that the fixed unit of resource, all other things being equal, tends to incentivise growth in subject areas that have higher margins and for which there is stable or growing demand, rather than trying to generate additional demand for more expensive and less popular subjects.

It is possible there might be changes to teaching and/or student support provision that have generated sufficient efficiencies to get to a break-even or modest surplus situation on home students that would make overall growth a sensible business strategy. This is the current focus of a lot of sector thinking on efficiency – if the unit of resource isn’t increasing fast enough, but student (and regulatory) expectations aren’t reducing, then the sector has to figure out ways to make its provision sustainable, through technology adoption, more sharing and collaboration among institutions, reducing costs in areas where the institution believes there is minimal impact on student experience, and so on.

While there is a lot of interesting thinking going on around efficiency, it’s doubtful that this number of institutions has made such significant progress as to get to the point of wiping out the home student deficit in its totality, though there may be some efficiencies to be gained through economies of scale.

There are also several less overtly strategic options. One is that the institutions in question don’t have that strong a central grip on their admissions. It’s easy to imagine in a devolved academic system individual departments and faculties pursuing growth to increase their own overall income without a great deal of attention being given to the aggregate effect on the institution as a whole.

The final possibility – and in all honesty I think this is probably at least a somewhat accurate assessment – is that the calculation is that growth, even cross-subsidised growth, will demonstrate market strength, which will satisfy boards of governors, reassure lenders, and keep the university in good fettle with the bond markets. Which raises the question about what happens next year and the year after that. Growth, even for the most popular institutions can’t be an indefinite strategy. And what happens to the rest?

For the big players, growth can generally be deployed as a tactical response to immediate financial pressure, while structural or operational change can be deferred to future times, when there’s more bandwidth and appetite for change, or clarity about the policy environment. Other institutions don’t in most cases have that luxury and some are likely to be less stable as a result.

The policy response

So how should government respond? It’s very hard to make the case that students should be forced – or at least obliged – to attend an institution that isn’t their first choice simply to ensure that that institution remains generally healthy and sustainable. We should also on principle give those selective institutions the benefit of the doubt on their strategic preparedness for a different intake this year. Growth in the hundreds in an institution of thousands, if fairly evenly spread, needn’t be an issue if there is a plan in place to support those students and notice if any are struggling.

It’s still worth saying, though, that if you’re looking through the lens of student interest, the market principle that student choice is the most important thing only holds true if the basis on which prospective students are making choices has a meaningful relationship with their prospect of flourishing at their chosen institution. So it remains a bit of a worry that if there are issues we’ll only know about it when the outcome data surfaces in the coming years – too late to do anything about it.

Some in the sector wish there was a way of putting restraints on the market without resorting to institutional student number controls. There are options short of total control that might focus on restraining or encouraging recruitment in particular subject areas, or asking institutions to evidence the case for growth, and/or subjecting them to more stringent oversight when growth exceeds a certain margin. It would also be theoretically possible, though very complicated, to set quality thresholds around inputs ie set conditions around the available resources in the learning environment all students should be able to expect.

But it’s also worth government giving consideration to the idea that in market terms all of this only is an issue because the perception is that the size of the market is pretty fixed and institutions are by and large vying for a larger slice of the pie rather than trying to grow the pie. UCAS data tends to support that view as applications via UCAS have seen growth at a lower rate than the sector hoped given the demographic growth in 18-19 year olds in the wider population.

Published UCAS data does not, however, capture applications made direct to institutions or, indeed, PG-level applications, and there may be growth or potential for growth in other parts of the market. Market purists would argue that if a provider is not seeing success in its traditional market then the smart move is to tap into a different market. While this might be accurate in strategic terms, this analysis tends to gloss over the risks and complexities involved in making such a pivot, especially when the provider in question is already feeling financially squeezed.

Even if your market share is eroding, trying to win it back can be perceived as a path of less resistance and more immediate potential reward than entirely retooling the whole offer – even if thinking this way is also a highly risky strategy if things continue as they are and the rewards fail to materialise, as some institutions have discovered to their cost.

If government wants a policy win on two key fronts: widening access to selective institutions and broadening the pool of people who benefit from HE in general, it could do worse than to create a programme of support explicitly targeted at those institutions who are less powerful in the “traditional” market but that still have a great deal to offer their localities, and work with them to develop the offer to prospective students where there is latent growth potential – pooling risk and transition costs, with a payoff ultimately realised in skills and economic growth.