Many things have changed for universities over the past decade. But only a few are truly fundamental. One of those has been the explosive growth of competitive revenue in the system. In less than a decade running undergraduate provision has changed from state-allocated number-controlled stasis to fully competitive business. And big business at that.
The data brings home the scale of this change. Undergraduate recruitment alone has turned into a competitive market of the first order with £20 billion a year of competitive revenue flowing through it in 2019. Uncertain competitive revenue has displaced grant income so that it now makes up almost all income at many universities. Many universities now find themselves with fully competitive revenue flows comparable to some of the UK’s largest listed companies. If universities were added to the familiar FTSE groupings on a competitive revenue basis, higher education would be the largest industrial sector.
Competitive revenue has grown rapidly
The seismic change was the progressive removal of full-time undergraduate number controls in England that started in 2012. This policy was rapidly expanded to cover almost all students and affected other countries too, most significantly Wales. Full-time undergraduate recruitment is now effectively uncapped and fully contested at English and Welsh universities. Universities in Scotland and Northern Ireland participate in the market for international and “rest of UK” students but are essentially protected from competition (through allocated numbers) for their home and EU students.
Segmenting the most recent 2019 UCAS data by these domicile and study permutations lets us estimate how much competitively sourced revenue has been in the full-time undergraduate system each year. We need to make a few assumptions on international fees, course length and progression rates. We’ve also calculated the revenue from student accommodation. This is based on an estimate the proportion living away from home, and what they spend on rent from the student income and expenditure survey. Not all of this goes to universities (perhaps more should), but it is intrinsically part of FT UG place. And so, we would argue, part and parcel of the revenue that is being competed for between universities.
Figure 1 shows the size of the competitive market in FT UG on this basis. Prior to 2012 competitive income in the FT UG market was small. Around £2Bn a year from overseas students’ fees and their associated accommodation. When English number controls were partially removed in 2012 this started to grow. And as more controls went, and these increasing contested entry cohorts percolated into registered students, steadily replaced income from number controlled “allocated” students, the economic value of the market increased further. Our calculations on the latest UCAS data for 2019 entry put the size of the competitive market in FT UG at £20 billion for the first time. This, needless to add, is a lot. HE has become, almost overnight, one of the largest competitive markets in the UK.
Figure 1: Total competitive revenue resulting from FT UG
Tuition fee competitive revenue has reached £14 billion this year, and the large majority of that market is around providers in England (Figure 2). As you would expect, students from England are the major “purchasers” in this market (Figure 3). But overseas students are also significant as they are contested across the UK and have increasingly higher levels of fees. Students from Scotland and Northern Ireland are trivial participants in this market. Almost all Scottish students take up places in their number control system. Most NI students do too, though a lack of places there forces around of third of them to participate in the English market, though their absolute numbers are too small to show up here.
Figure 2: Competitive revenue from FT UG tuition fees, by country of university
Figure 3: Competitive revenue from FT UG tuition fees, by student domicile
The university as a business
As total competitive revenue has grown, so has the competitive revenue of individual universities. The HESA finance data is at a fine enough resolution to have a go at dividing up total income into competitive and non-competitive sources, covering not just UG fee income but PG too.
Tuition fee income for overseas and postgraduates is “competitive”. Whereas funding council or government grants are taken as “non-competitive”. For undergraduate tuition income, we’ve set it competitive/non-competitive according to the permutation of domicile of student and country of institution. Revenue from accommodation and conference hosting is treated as competitive, but investment income and donations from alumni as non-competitive. There will be approximations and simplifications in this, not least the sometimes very large “Other” category. But, overall, it’s a good measure for capturing total competitive revenue across universities in a consistent and comprehensive manner. On this basis, the total income of the sector was £38bn in 2017-18, with £32bn of that being competitive, and just over half of that being tuition fees at English universities.
Figure 4 shows the level of competitive income for against the proportion that forms of the university’s entire income. We’ve used a logscale for the competitive revenue (because of its large range). And we’ve restricted it to the 150 largest providers by competitive income (with a bias towards FT UG providers). Many universities have competitive revenue of hundreds of millions a year. A few have competitive revenue around the one billion a year mark. And for universities in England and Wales having 90% of your total income as competitive revenue is common. There is very little buffer of non-competitive income left.
Figure 4: Competitive revenue, share of total income (Y) and value (X)
University leaders will be familiar with these dizzying strings of zeros from their accounts and budgets. But it is the extent that the total income for the university is now competed over, and could disappear, or double, in short order that is new. How far universities have moved over the past decade is shown by comparing their competitive revenue to the data on public listed companies.
Figure 5: The competitive revenue of universities and selected listed companies
Figure 5 shows the distribution of competitive revenue of our 150 universities to companies in the FTSE100 and FTSE250 groupings. We’ve subset this to those incorporated in Great Britain, excluding investment companies, and converted US Dollar and Euro revenues converted to approximate Pounds. We’ve reduced the income of universities to just their competitive revenue component, and compared this to the total reported revenue of the listed companies. Many universities are individual competitive market participants of national rank in terms of competitive revenue, overlapping heavily with the FTSE250 group.
The FTSE groupings are determined by market capitalisation – the value investors put on the company through what they are prepared to pay for its shares, considering its profit, prospects and numerous other factors. There isn’t any equivalent figure for universities. But revenue is an important factor in market capitalisation. Simply for the purposes of comparing these two worlds, let us suppose that the rankings were dictated only by revenue. And that our 150 universities were listed companies entering these rankings determined only by their competitive revenue (compared to existing FTSE350 companies).
Figure 6 shows the industrial sector composition of the UK’s leading companies on this alternative perspective (remembering that we are dealing with a subset of the index since we have excluded investment companies and others). Many universities would be large enough in terms of competitive revenue to displace existing FTSE350 members. We estimate around 20 universities would be large enough to enter this new index, making higher education the largest industrial sector by participants in the process. Most of these 20 would slot in alongside the revenue of existing FTSE250 companies. And many more hover only just outside. Despite the large number of universities, the overall scale of the competitive market they are in makes them individually the peers of leading competitive businesses.
Figure 6: Industrial sectors of leading companies on a competitive revenue grouping
The market mindset
The government in England wanted to introduce a market into full-time undergraduate higher education. The data shows that it has succeeded on a gigantic scale. The reforms, strong underlying demand from 18-year-olds, and ever-growing international recruitment have pushed competitive revenues to £20 billion for the first time this year. This is a fully competitive market of the first rank. And it has come into being in very short order. It didn’t exist a decade ago.
Most universities in England and Wales are now dominated by competitive revenue, income that can be doubled (or be totally lost) by being better (or worse than your peers). The change and the huge growth of the overall market as has propelled many individual universities into a world where the scale of their competitive revenue that would not look out of place amongst the country’s leading companies. HE has become big business. And individual universities are big businesses. Regardless of whether they see themselves that way.
Of course, universities are many other things too. But we believe it is this aspect of their role as competitive businesses in a large scale market that is changing their context most profoundly. Our experience is that, so rapid has this change been, that the culture and operating structure has tended to lag this reality. Being successful in big business needs a different set of corporate capabilities than those that have served universities well in the past. Our focus at dataHE, using data better, is a good example of that. But is just one of many adjustments to be made. Over the next decade, we think successful universities will demonstrate a strong market mindset: knowing their context as big business and adding the new organisational capabilities that this demands.
This analysis used published data from HESA and UCAS. The London Stock Exchange has information on the FTSE350 index and its constituents.