What universities do instead of closing

There’s an old, bleak, joke among jazz musicians that runs something like this:

How do you make a million pounds playing jazz? Start with two million.

It is, simultaneously, a lament for the almost comical lack of money in the genre (and indeed, most live music) and a proud reminder that whatever we do this stuff for, it isn’t because it makes business sense.

Sure, you might delightedly return home from an evening gig holding £50 (your share of £200 for the four of you) but it barely makes a dent in how much it cost you (travel, practice, instruments, tuition) to be able to do it in the first place. It would be great to live and work in a world where live jazz is valued and musicians are paid enough to make a living.

But we do not.

And nevertheless, we persist.

The case of higher education

Universities, in contrast, are generally considered to be able to cover their costs – up to a point. It goes without saying research income leads to a loss against the cost of performing research. And it is well known that teaching home undergraduate students in nearly every case costs far more than the income you get from fees and the OfS for doing it.

Again, the kicker is the reminder that whyever the sector does these things it can’t be for the money. If you wanted to make money, you wouldn’t run a university. You’d only contemplate doing that if you cared about educating people and discovering new things.

Some providers do OK on postgraduate fees from home domiciled students. Not everyone, and the market is volatile, prospective students less financially stable, and competition rapacious. Margins are narrowing.

The traditional moneyspinner in higher education is international student recruitment. Attracted by the prestige of UK higher education, the quality of provision, and (face it) the English language and quality of UK life, there has been a huge expansion in both the number and diversity of international participation.

Every university wants a piece of that, at both undergraduate and postgraduate level. And every university is now exposed to some aspect of that market, just as a combination of cost of study increases, global instability, and government policy makes the UK less attractive. That’s the moment everyone, much to the chagrin of the OfS, has done the university equivalent of an all in bet on a pot that is already shrinking.

We’ve had the international student boom years. They’ve been good. But now what?

Other income streams – there are no other income streams, not really, not outside of a few edge cases in a few particular sets of circumstances (corporate training delivery is big in a handful of providers). For all the talk of innovation and engines of growth the work on commercialisation, if it returns a profit at all, returns so little it barely touches the sides. Short courses, conferencing, catering – really side concerns, ticking over rather than cross-subsidising.

What happens next?

There is a popular narrative that everything will turn out alright as long as recruitment holds up. Recruitment, in a lot of cases, is not holding up – but even if it was recruiting more home undergraduate students that cost you more money to teach than you get to teach them with isn’t exactly a plan for sustainability or growth.

Recruitment – the traditional, UCAS, stuff – is not the metric by which hard decisions are made about which courses are viable. Sure – a course needs students, but simply having students doesn’t make it viable.

When universities get into financial trouble – as any good consultant will tell you – there’s really three stages of activity.

The first is getting a grip on the problem, and patching the immediate holes that could (if left untreated) do serious damage. Is a covenant on borrowing being breached? These can be renegotiated if you move quickly and are honest about your position. Has a partnership gone bad? You extricate yourself.

Generally you want to be borrowing money only to invest, but many universities have a rolling finance agreement with a bank (a bit like an overdraft) that helps to smooth unexpected rough patches. Though convenient, and life-saving on occasion, this is not a cheap or sustainable way to borrow cash. If an arrangement like this is being used regularly, you have a problem.

The acute moment of a problem is the point, if things are really bad, that you might consider liquidating assets. Nobody wants to do this – you can only do it once, and if you are selling things like equipment or estates when the economic climate is generally scary you are unlikely to get much for them.

Chatting to Sam Sanders at KPMG made clear to me how many providers stop at this point – having plugged the most egregious holes. As he put it:

immediate focus is often on the short-term levers of cash control, such as reduced discretionary spend or recruitment freezes. If you want to sustain your university in the longer-term, it is vital that you think clearly about the size and scope of your provision

When you’ve given yourself a little more time (or if you are sensible enough to plan ahead and mitigate rather than repair) it makes sense to think about these fundamentals. If you start with the idea that universities aren’t things that make money, but you want to keep doing university-style things (teaching, research, and so forth) you want to have at least a crack at making it sustainable.

This might, counterintuitively, mean spending money. Is your estate right for the kind of activity you plan to do?

Sam highlighted pressures on estates and systems as one potential issue:

The way we work, and the way students prefer to access education, has changed radically in the last few years. Despite significant moves towards hybrid working during Covid, many universities still have estates set up for mass, in-person attendance – with private offices, lecture theatres, seminar rooms. In many instances, systems and spaces are still looked at in isolation, restricting opportunities for remote working or blended delivery.

The hard work here deciding to stop doing things where the subsidy needed is too great. Areas of provision that require unique resources that are not easily shared are one thing that university leaders will look carefully at, with areas that are well and locally duplicated being another. Likewise, there needs to be a close examination of areas that put the provider at regulatory or reputational risk – output metrics are a particular concern here at the moment.

Conversely there are things you need to do that don’t need to be as “gold plated” as they are. There are many processes and practices in university professional services that could be streamlined with minimal detriment to the way they are experienced for the most part. A re-focus on the fundamentals, and letting go of some of the nice-to-haves, represents a common approach to seeking savings. It goes without saying that this is stuff that needs to be done carefully and thoughtfully – changes like this are not to be taken lightly, and may also simply mean storing up issues for later.

Suffice it to say that there’s no formula or magic chart that can be applied universally. As Sam notes:

What a university chooses to teach or research should never be determined by simple profit and loss considerations in isolation. But it needs to be an active, considered, decision-making process, and the consequences need to be identified and managed accordingly.

Part three

Assuming you are now stable and set for the next couple of years (right-sizing, as the jargon has it) there is a further phase of activity – planning for growth. This needs to be realistic and pragmatic – based on a clear-eyed understanding of your place in and exposure to various markets, the identification of gaps in these markets which you are well placed to fill, and of your continued ability to service the parts of each market you currently do well in.

If that all sounds like your strategic planning process then this is intentional – but it is important that you rethink your plan from the ground up rather than hanging yet more baubles on the Christmas tree. This is, after all, step three of a process that started with you frantically stopping up holes in your existing plan – it is possible that your existing plan is a part of the problem.

There are other, wilder, ideas that often come up – and principal among these is the idea of sector rationalisation. There is the potential for many savings when institutions work together (sharing back office services, strategic alignment, co-delivery, complementarity of offers, resource sharing) but very few of them are realisable. Whether within a longer term plan or as a last-ditch effort in a serious crisis, mergers and collaborations generally work better in the abstract rather than in reality.

Mergers are hard – in any environment. And within a sector that has seen commercial ideas around competition driving efficiency ladled onto generations of institutional autonomy the small number of successes (due, largely, to the quality of individual relationships alongside uniquely favourable circumstances) speak eloquently of the large number of stalled discussions and aborted strategies.

In any business the biggest risk is always linked to finance – in higher education the bulk of finance comes, directly or indirectly, from the government. In essence, this puts “the government does something silly” right at the top of your risk register. Even if we didn’t have a government with a track record of doing very silly things, mitigating against such a risk is nearly impossible. In a set of circumstances where nearly all of the risks faced by providers are from circumstances outside of their control, any form of mitigation is limited.

And yet – universities keep wanting to be universities. If you’re fond of arguing that the sector is now too corporate, too commercial, or has strayed too far from an imaginary gilded past you should be aware that the sensible commercial course of action would be (in the majority of cases) to pack up and go home.

Financial analysis will only get you so far – a university is a communal choice to keep doing things that are unsustainable because you believe they are the right things to do (for the locality, country, or world). But it needs to be a conscious choice, and it needs to be at least tempered with realism.