The publication on Friday of a report from the Office for Students (OfS) detailing the financial challenges facing higher education institutions in England is accompanied by calls for “bold and transformative action” to improve the sustainability of these organisations.
Past experience over 15 years of dealing with institutions in financial difficulty in a variety of roles from senior leadership, to governing body and sector oversight has led us to believe that the future will not be characterised by the emergence of lots of voluntary shared service and joint activity.
Over the last twelve months we have spoken to university leaders, governors, consultants and auditors about the recruitment and financial challenges in the higher education sector. Based on these conversations it appears that a majority of institutions are taking most of the following ten steps to reduce forecast financial deficits:
- Introduce a freeze on new staff recruitment.
- Reduce non-pay budgets.
- Renegotiate credit/overdraft arrangements and banking covenants.
- Introduce voluntary severance arrangements and contingency planning for compulsory redundancies.
- Prepare optimistic forecasts of future income growth based on improved recruitment assuming they could achieve one per cent of all undergraduate and postgraduate course numbers at other UCAS registered providers.
- Withdraw from expensive low demand science courses, eg chemistry and physics.
- Pause or reschedule capital programmes.
- Mothball or sell buildings.
- Engage in tentative discussions with nearby institutions about shared services or course transfers.
- Withdraw from courses with low league table rankings, profitability, potential future growth and political sensitivity.
Unfortunately, there are problems with a number of these actions which will limit implementation or create unintended negative consequences or both.
Dial down your expectations
Reductions in non-pay budgets (option 2) will challenge the income of the sector-wide shared services and representative bodies that already exist and which are dependent on subscription income. We won’t list the bodies that currently exist in this category, but when a list was created to accompany the development of the Higher Education and Research Bill there were over 200 organisations involved. Crucially this change will reduce the information sharing, strategic awareness and staff development capability within the sector limiting the ability of providers to interpret developments and respond to them.
Optimistic student recruitment forecasts (option 5) may fool governing bodies, but they won’t deliver the expected results and only run the risk of making the hole deeper. There are 453 higher education providers in the UK and 165 universities. Simple maths indicates that a one per cent target of all students in a course category is unlikely to be achieved. Beyond this numeric limitation there is a major problem with optimism bias. The UK government’s Infrastructure and Projects Authority (IPA) assumes that there will be an optimism bias of up to 20 per cent in most estimates of future cost savings or income growth. This tendency to see things through rose tinted glasses can be mitigated by comparing past forecasts with the actual out-turns and by the regulator publishing optimism bias estimates by institutional type on a regular basis.
They can also be overcome by scenario planning, wargaming possible changes and conducting pre-mortems. There is guidance on all these techniques on the UK Civil Service website. These are all techniques governing bodies should be using, and this activity should be led by the independent members of these boards.
Department closures and course portfolio changes (options 6 and 10) have the potential to create significant regional and national skills problems. There are at least two regions of the UK where strategically important subjects are currently being considered for discontinuation which will leave these areas with subject cold spots. This could be overcome with an increase in the expensive subject premia for selected subjects guided by regional assessments of need. This is something that Local Skills Improvement Plans (LSIPs) should be empowered to do under guidance from Skills England and the OfS.
Voluntary shared services, course transfers and mergers (option 9) generally don’t work as intended in the higher education sector and lots of time and/or money can be wasted in their planning. The basic problem is that institutional leaders want to appear supportive publicly, but privately won’t do anything without a massive risk premium. That is additional cash in plain language. Preliminary estimates suggest that this could be £30m to £100m per medium sized institution in difficulty.
The problems with shared services and course transfers are VAT regulations on commercial shared service provision and Transfer of Undertakings Protection of Employment (TUPE) regulations. These add a minimum of 20 per cent to costs, excluding the upfront delivery costs and also create considerable uncertainty and risk of litigation. We have un-fond memories of going down this path in 2009–10 and again in 2015–17.
The challenge with going further than shared services is that the research on mergers (they are really takeovers) suggests they generally don’t produce benefits and probably fail more often than they succeed in higher education settings. For every Writtle College there are several ALRA, Heythrop and South West London colleges. Where they don’t fail they take an average of ten years to fully bed in new arrangements and someone will have to pay for the additional costs of rationalisation.
Many institutions are also focusing on income growth through rebuilding their overseas student income through increased recruitment agent activity, franchising or investment in improved league table positioning. There are problems here also as competition increases agent fees have risen as a proportion of students acquired and the real price of the courses on offer has fallen. A number of universities now no longer distinguish between home and international students in their postgraduate taught student fees. There are also potential problems with agent and franchise quality which sector quality bodies find hard to monitor in a timely manner. The gross income from these activities varies from £1,000 per student to £300 when these fees are paid by the franchisee and they aren’t always paid in full or on time. This is additional revenue, but as many business owners have learnt painfully in the past, “turnover is vanity, profit is sanity, but cash is king.”
The goal of better global league table positioning also appears attractive at first sight. There is folklore with some substance in the sector that a place in the top 100 of the QS or THE world rankings leads to improved high fee overseas student recruitment. The problem with this approach is that governors are easily duped by presentations that promise this achievement in the future. It is also problematic because the rankers have plans to increase the number of institutions they list from around 2,000 now to a greater proportion of the about 18,000 universities it is reckoned exist globally. This broader market penetration offers them the prospect of increased income from consultancy advice about how to rise up the rankings.
Aside from any ethical issues, the problem here is that as new entrants and lower rated institutions rise up the league tables others will be forced down. There are eight UK universities in the top 100 currently and 17 in the top 200. Will that be the case in ten years’ time? It seems unlikely and in this there are also problems for the rankers. The currency and prestige of the QS and THE systems depends on their being a disproportionate number of UK institutions in the upper reaches of these lists. If there aren’t, why would funders and prospective students bother with these league tables, why not use the Academic Ranking of World Universities (ARWU), CWTS Leiden or US News and World Report?
Plan for a bleaker future
The sad conclusion of the above is that there will be a reduction in higher education institution capacity over the next five years. This won’t be evenly spread geographically, by level or by subject. It would be best if these changes were handled by institutions individually mindful of their impacts locally and regionally.
If this is not possible or is unsuccessful due to leadership and governance failures, or exogenous shocks, this could be handled by managing down some activity on a regional footprint overseen by joint Department for Education (DfE), OfS and Skills England engagement.
If this is problematic because of Competition and Market Authority (CMA) rules it might be wise to explore the possibility of creating regional federations like the bodies that oversee most state provision in the USA. This has been considered several times in the UK in the past, most fully in 2003 by the Higher Education Funding Council for England (HEFCE). If this approach is necessary for legal reasons, it would be a good idea to trial it in one or two places before adopting it as an England-wide model. We anticipate that there may be judicial reviews instigated by institutions fearful of this change and the consequences for institutional autonomy.
That then raises the prospect of government legislating to overcome these legal challenges. At present this only seems likely and possible in the wake of one or more major provider failure. A medium or large failed institution will cost a lot of money to teach out the students over at least a five-year period. Several failed institutions would be a calamity. Now is the time for governing bodies to reassure themselves that they have the right balance in the list of ten initiatives above and for the regulators to consider the risks on a regional as well as a national basis. Through this activity we hope it is possible to get a better understanding of what bold and transformative change might actually look like in future.
It is the mid-80s all over again – post the 1981 UGC funding cuts of 15% on average, but 45% at Aston, Bradford, Salford.
Except this time the easy win of discovering the milch-cow of overseas student fees is not available, nor the subsidy of early retirement & redundancy packages from USS (nor now TPS).
And Us recklessly carry far more debt.
So, a 3/4 year restructuring plan is needed – perhaps with some form of repayable loan money from the DfE and with some hard monitoring from the expert teams sent in by the DfE (much as happened at University College Cardiff as it faced impending insolvency in 1986/87 – see Warner & Palfreyman, ‘Managing Crisis’, McGraw-Hill).
With such a robust & credible plan the auditors might still be able to sign off the accounts as a ‘going concern’ – and restructuring of debt will be readily agreed by lenders who over-lent negligently, not least since no bank will want the messy politics of triggering an insolvency and anyway no bank knows what is
the real market valuer of a second-hand collection of campus assets!
Thanks David, very much appreciated. When I worked in Government I used to encourage/make colleagues read your book with David Warner on Managing Crisis [in universities]. An excellent set of case studies of what went wrong in the past. As you imply history does repeat but may be this time, with less money around, it screeches rather than rhymes?
Perhaps the following might be helpful:
1. Governance: Finding solutions to financial shortfalls and changes in the financial climate are matters for the executive, the vc, pvcs, registrar, director of finance and other senior professionals, because they know the institutional issues in detail and are responsible for implementation. Governing bodies are too distant from the detail and do not generally have the expertise. Their job is to govern not manage.
2. Most suggestions for dealing with the financial crisis are generalised across the university sector but this conceals the diversity of institutions within the sector. Institutional financial profiles depend on age, reputation, location and subject spread—Russell Group university income may only be dependent on home tuition fees to the extent of 25% while a post-post-1992 university and some post 1992s may be dependent on them by up to 65% (CGHE Working Paper 119). Even within these disparities every institution is an individual case with its own physical endowment, estate issues and reputational inheritance and its problems need to be addressed individually.
3. The greatest vulnerability arises from the freezing of home tuition fees and this affects most severely universities that happen to be particularly aligned with present government policies and regional/local interests—acting as anchors in their communities, levelling up, catering to the needs of home based students. Such institutions should be a priority for short term state assistance through grants or loans.
4. One immediate step would be to discourage large research based institutions from lowering their student entry tariff in order to maintain their home tuition fee income at the expense of institutions heavily reliant on home tuition fees; this might be by appealing to their support for the health of the sector as a whole or by other means.
5. The tenor of the exchanges around coping with the financial crisis are understandably negative and involve large scale cuts and staff redundancies. A more positive approach would be to address the possibilities of enhancing institutional income by targeted earned income programmes. A change in financial culture and an emphasis on the value of financial autonomy would be good for staff morale at a time when the Government is confronted with enormous public sector challenges which affect us all.
Michael thank you for the helpful comments. 1 Agree completely that executives should lead and the governors should be responsible for governance and not try to manage. However, unlike many other sectors most governing bodies in HE do not have many independents with experience of leadership in the organisation’s main areas of activity. That has traditionally been left to the Senate/Academic Board. These arrangements create difficulties in times of tightened budgets and increased competition because the governors are ultimately responsible and potentially liable for the financial health of the institution. If the institutions they oversee have processes which produce overly optimistic forecasts of student numbers and finances for several years and the institutions run deficits, have high borrowings and low cash reserves there can be existential problems. The challenge here is to encourage greater realism in the forecasting and scrutiny to reassure the board the estimates are realistic. 2. Agree the financial position varies considerably between institutions and one of the big challenges not mentioned in the debate today is that recorded research expenditure often exceeds research income. 3&4 agree that voluntary restraint on student numbers and maintenance of entry standards would be good, but not sure that this will happen. I note only one sector commentator is consistently calling for the reintroduction of student number controls. 5. Agree with the need for a greater positive focus on financial autonomy and other income sources. I note a recent article which outlines the business model for the universities many in the Russell Group might want to emulate. It’s a very different approach and is probably not open to all. Harvey, C; Gibson, A; Mueller, F and Maclean, M. (2022) Philanthropy and sustaining of global elite university domination, Organization, Vol. 31, No 3, pp433-457.
It’s a good list of interventions. Further question for governance is whether there is a strategy that creates a sustainable institution. Much of the list is reactive and tactical, and not about medium to long term market position or creating sustainable operating models. As author notes these are matters for management, with the governance responsible for the direction, sustainability, and performance monitoring. It’s not unreasonable to argue for state assistance in extremis – but it seems that many arguments are made about why it’s needed, but fail to address what the institution/sector has done to self solve. As is shown in pretty much every other area of state aid, solid business plan that can withstand the scrutiny of Deloiites/PWC etc and the banks is a precursor to any assistance. This places much more emphasis on how you will deliver (ie strategy) that 1% student growth or 5% cost reduction rather than just high level targets. Take FE and the NHS, financial assistance comes with very high level of intervention, control, and expectations of governance and management, that if not met, inevitably leads to change in personnel. This also drives behaviours as no management/board want intervention and assistance as it means loss of control, so it creates more intensive effort to self solve. Which all circles back to having a credible business plan, with deliverable strategies, and governance that measures progress. There’s very little we are seeing in the sector that wasn’t foreseeable so the fact that there is more crisis and urgency is a factor of both (i) sustained adverse operating conditions but also (ii) arguably not enough intervention soon enough.
Lots of reference to governance but do we actually value governance? Not sure we listen to governance professionals about change until we hit serious problems unfortunately.