Oligarchs,
innovators
and zombies
OLIGARCHS, INNOVATORS and ZOMBIES
Contents
1. Who’s taken all our grants?page 4
2. Where have all the students gone?page 5
3. No jam from the REF?page 6
4. Changing sentiments in the SCRpage 7
5. Apocalypse postponed?page 8
6. The new orderpage 10
7. Strategies for the new orderpage 12
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OLIGARCHS, INNOVATORS and ZOMBIES
WHO’s taken all our
grants?
Radical restructuring of university funding may have shielded
Higher Education (HE) from fiscal austerity, but not for long1.
In 1998 Gordon Brown, who was then Chancellor of the Exchequer,
announced the first comprehensive spending review, intended to set
public spending budgets for three years ahead, rather than annually.
Over the following 12 years English universities enjoyed year-on-year
increases in funding. This came to an abrupt halt under the coalition
government in its 2010 spending review2, which slashed the teaching
grant delivered by the Higher Education Funding Council for England
from nearly £4.5 billion in 2010-11 to less than £1.5 billion in 2013-14.
While HEFCE’s research budget of a further £1.5 billion was protected
in cash terms, inflation has taken at least ten per cent off this in
real terms. In parallel with the cuts to grant funding, undergraduate
tuition fee levels have been raised, backed by subsidised student
loans, enabling ministers to argue that the total level of public funding
devoted to higher education has actually increased over the period.
Over the next few years, expect to see the
fiscal knife wielded in three areas: further
reductions in HEFCE’s remaining funding
for teaching; inroads into the hitherto ringfenced research budget; and changes to the
terms of student loan repayments designed
to reduce the cost to the taxpayer. Prudent
university planners should prepare for the end
of recurrent and capital funding for teaching,
probably coupled with an extended cap on
undergraduate fee levels and quite possibly
new requirements for institutions to contribute
in some form to the costs of student loans.
And so it has seemed for most institutions. Undergraduate fee
income for home and European Union students of around £8,250
(on average) per head per year represents a healthy premium on
the grant-plus-fees levels enjoyed prior to 2010, except for the most
expensive, lab-based courses. In consequence, over the past two
years, universities have experienced their best-ever financial results3
recording average surpluses of nearly 4.5 per cent and banking nearly
£8 billion of cash reserves.
It seemed almost too good to be true, and so it is proving. Celebration
of the relative financial strength of the sector (reportedly) led the
Treasury to conclude that universities were “awash with cash”. So
it was inevitable that HE was targeted for further cuts in this year’s
spending review. Indeed the Institute of Fiscal Studies warns that
further cuts will fall4 in the 2015 post-election budget cycle.
1.
This paper is based on an article first published in ‘HE’ from Research Professional (http://www.researchprofessional.com/0/rr/he)
2.
http://www.parliament.uk/briefing-papers/sn06206
3.
Financial health of the higher education sector: 2011-12 financial results and 2012-13 forecasts, HEFCE March 2013
4.
Institute of Fiscal Studies, Green Budget: February 2013
OLIGARCHS, INNOVATORS and ZOMBIES
Where have all
the students gone?
Prospects of further public spending cuts are made worse by
the outlook for fee income.
This scary scenario might perhaps be tolerable if student numbers
could be expected to maintain the reliable growth experienced in the
past. After all, as others have observed, teaching undergraduates at
£9,000 a pop can be a highly profitable business5. Universities have
always been confident of filling their planned student numbers, buoyed
by excess demand in the system. But the pointers of student demand
trends are now turning downwards. A recent Universities UK report
found that home and European Union undergraduate recruitment in
2012 fell nine per cent6 below institutions’ planned intakes, leaving
many courses unfilled even in supposedly popular universities. The
decline has been even steeper for part-time and mature (over-25 yearold) students.
Notwithstanding improved intakes in 2013, the projections for coming
years are for further reductions in demand, fuelled by the combination
of demographic changes, potential students’ concerns over the
increased costs of study, downgraded employment and earnings
expectations, and the rapid growth in attractive employment-based
alternatives to conventional campus-based study.
The gloom is exacerbated by the apparent decline in international
students, who have traditionally been treated as cash cows by
university planners. Over recent years, universities have been able to
rely on a ready flow of students from China, India and other emerging
economies in order to sustain otherwise uneconomic courses. Although
the UK has expanded its market share, this demand can no longer
be taken for granted. The report from Universities UK notes that the
number of international recruits fell significantly in 2012, especially from
traditional markets including India, Pakistan and Nigeria. Demand from
China seems to be holding up, at least for now, but the competition is
becoming ever fiercer.
“The pointers of student demand trends are turning
downwards”
5.
Research Professional, June 2013
6.
Universities UK, The Funding Environment for Universities, an assessment, June 2013
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OLIGARCHS, INNOVATORS and ZOMBIES
No jam from the REF?
University research has so far been protected from public
spending cuts, with funding council and research council
budgets ring-fenced in cash terms (but falling in real terms).
However it would be dangerous to be sanguine about the
outlook for research in the longer term.
Universities’ income from teaching has long been used to subsidise
loss-making research, which has typically recovered only 70% of full
costs. Looking ahead to the next spending review, which will come
after the 2015 election and the 2014 Research Excellence Framework
review, an even more worrying scenario looks possible.
By then it seems highly likely that the squeeze on fee income and
margins will be even tighter than now and that HE will face even
more public spending cuts, which will inevitably affect research. The
concentration of available research funds among fewer universities
and on big science projects – with almost three-quarters of current
funding going to just 20 institutions – will doubtless continue. There is
hence a real prospect that many institutions could find in a few years’
time that their research standing has improved (as a result of the
huge investments being made for the Research Excellence Framework
assessment) while their research funding has declined.
“The sustainability of research capabilities will
become a major issue for many institutions over the
next few years.”
OLIGARCHS, INNOVATORS and ZOMBIES
7
Changing sentiments
in the SCR
The profound implications of the
double whammy of funding cuts and
reducing student demand are beginning
(somewhat belatedly) to dawn on vicechancellors and planners.
PA recently published a report7 based on its
2013 annual survey of vice-chancellors and
other leaders of UK HE providers. Past surveys
had shown guarded optimism for institutional
wellbeing, shored by confidence in continued
government sponsorship and student demand.
This year the survey revealed:
• widespread worries over the outlook for
student demand, from all sources and levels,
and over the prospects for substituting fee
income for lost grants
• acceptance that universities can no longer
look to government to help them through
this disruption: many vice-chancellors cited
government regulations and market controls
as the biggest hindrances to their ambitions.
• institutions competing for students through
more expensive and tailored learning
experiences designed to enhance future
employability
• recognition of the need to think innovatively
about where, when and how students
are enabled to study and the roles new
technologies can play
Similar views, calling for recognition of the
new student-driven realities of HE, also come
in the recent Institute of Public Policy Research
commission8 on the future of HE and in the
English funding council’s latest report9 to
government on the impacts of changes in HE
policies and funding. But will the realisation
come too late for some universities?
7.
Charting a winning course, PA Consulting Group June 2013
8.
A critical path: securing the future for UK higher education, IPPR Commission on the future of Higher Education, June 2013
9.
Challenges and opportunities: the impacts of higher education reforms on students, universities and colleges, HEFCE March 2013
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OLIGARCHS, INNOVATORS and ZOMBIES
Apocalypse postponed?
Many observers and commentators on the changing HE scene
predict mayhem.
In the PA survey, more than 55 per cent of vice-chancellors thought
it very or quite likely that there would be a significant number
of institutional failures; some ventured to suggest that 20 to 30
institutions could become unviable over the next decade. Almost
80 per cent predicted substantial rationalisation through a wave of
mergers and takeovers. Others (such as the Institute for Public Policy
Research) have predicted that the combination of global competition
and new technologies will create a technology-fuelled avalanche10
that will sweep away those traditional providers not agile enough to
reinvent themselves.
Similar predictions of impending apocalypse have been made over
many years, not least by Peter Drucker in the 1990s and continuing
through such luminaries as Bill Gates, Clayton Christensen and, most
recently, Sir Michael Barber. They have yet to come true – and almost
certainly won’t.
No British university or public HE provider has yet had to close
through insolvency or market failure, although a few have come close
and others have been saved by quietly brokered mergers with other
institutions. There are many reasons for this, not least the lack of
defined mechanisms for winding up a university, analogous to those
for winding up a company, and the many legal, political and economic
constraints to so doing: who owns the assets? Who is liable for the
debts? What will happen to the students, staff and buildings?
And officially brokered mergers have become much harder than
in the past, because the English funding council no longer has the
wherewithal to oil the wheels with quiet cash injections. (This is in
contrast to Wales, where the Assembly government is mandating and
funding institutional mergers).
“Predictions of impending apocalypse have yet to
come true – and almost certainly won’t”
Of course past experience is no guarantee
of the future survival of an ailing and
beleaguered university. Some, perhaps many,
institutions will struggle for solvency amid
these changes. Yet this does not necessarily
mean that they will inevitably be wound up or
swallowed up by other providers.
This is not to say that there will not be
significant rationalisation – indeed, it is
already happening. Almost every institution
has been reviewing its back office and
support service activities, with a view to
reducing overheads and indirect costs, and
this has led to substantial reductions in
staffing and operating costs in non-academic
areas. In addition many universities have
been closing small and under-recruiting
courses, with the result11 that there were
20,000 (or 27 per cent) fewer courses
advertised through the Universities and
Colleges Admissions Service in 2012 than in
2006. Beyond this, there is much anecdotal
evidence of universities closing or merging
underperforming departments.
Clearly a strong process of rationalisation is
happening within if not between institutions
as they seek to become leaner and more
focused on their areas of perceived strength.
This is arguably a process that should be ongoing at any time across well-run institutions,
and not necessarily a response to financial
distress – although in practice that is often
just what it is.
10.
An avalanche is coming: higher education and the revolution ahead, Barber et al, IPPR March 2013
11.
Analysis of UCAS acceptances for 2012/13 admissions, Independent Commission on Fees, April 2013
OLIGARCHS, INNOVATORS and ZOMBIES
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OLIGARCHS, INNOVATORS and ZOMBIES
The new order
So, if there is not to be a mass shake-out of institutions, what
might HE look like after 2015? We venture to suggest that
universities will fall into three very different categories: the
oligarchs, the innovators and the zombies.
The figure below characterises the relative positioning of HE providers
in terms of their balance of inherited strengths and weaknesses and
the priorities displayed in their future strategies.
Extend
Following the wake of this small elite is
a large cohort of ‘wannabe oligarchs’ –
universities that present themselves as
research-intensive and international players
to an extent that often exceeds their
assertions. While some can justifiably be
viewed as ‘junior oligrachs’, many others
seem to be willing away the dissonances
between their self-image and their business
realities.
INNOVATORS
Oligarchs
Innovators
Consolidate
Strategic focus
Explore
What kind of university is yours?
going to British universities), and not many
others. These oligarchs have the resources,
global reputation and strategic relationships
to weather the storms of funding cuts,
wavering student demand and increased
competition without great changes to their
established operating models. They may well
become even stronger as scarce research
funding, and all of the benefits that go with
it, becomes even more concentrated among
them.
ZOMBIES
Positive
Mixed
Vulnerable
Strengths/weaknesses balance
Oligarchs
In PA’s most recent annual surveys, almost 90% of vice-chancellors
have forecast the emergence of a small super league of elite
institutions; in reality, that situation already exists. There is an
established oligarchy of large, research-intensive universities that
scoop the pool of national research funding and compete strongly
for students, staff and funds on a genuinely global level. The list is
not long: the universities of Cambridge, Oxford, Imperial, UCL and
LSE (who between them generate almost one-fifth of the revenues
of UK universities, and secure over one-third of the research funds
For everyone else, sustainability will depend
on developing new ways of doing business
and engaging with students, employers and
other client groups across the international
HE landscape. Universities must reinvent
themselves from being the consumers of
public funds to earning their living in highly
competitive markets.
Many have anticipated this challenge,
experimenting with enterprising educational
offers and channels, most often in partnership
with other providers.
Examples of the new wave of innovative
universities include (among others):
• The University of Warwick’s strategic
alliance with Monash University in Australia,
which has established campuses in China,
OLIGARCHS, INNOVATORS and ZOMBIES
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“The system of higher education will become more pluralistic, with the blurring
of distinctions between public and private provision, more competition from and
collaboration with private, for-profit providers, more specialised niche provision and more
international partnerships.”
Italy, Malaysia and South Africa, that gives both universities global
presence reinforced by joint appointments and the pooling of research
strengths
• The University of East Anglia’s partnership with INTO, a private
provider of pathway and other targeted educational offers, delivered
in 50:50 joint ventures with university partners. The partnership aims
to extend into a range of international postgraduate programmes
offered in London
• The University of Liverpool’s partnership with Laureate, a US-based
company that owns and runs more than 70 universities around
the world; the partnership delivers Liverpool’s online courses over
Laureate’s global networks, and is extending to develop a jointly-run
campus in China
• Northampton University has redesigned its curriculum, student
experiences and business models around the principles of social
enterprise, engaging students in the management and delivery of
enterprise services as part of their courses, which has catapulted
the institution into the top five British universities for business
collaborations and employability
• Coventry University has been active in diversifying its operations,
setting up a new campus in central London to provide business and
finance programmes for international students and also a separate
University College which offers a range of vocational, mainly parttime courses for work-based students, as well as several trading
subsidiaries.
The diversity of these and similar initiatives, which contribute towards
the expanding range of choices available to students, is leading
towards a very different HE system. The prospect has been described
by one vice-chancellor (responding to the PA survey) above:
Zombies
But what of the universities that will not or cannot change? The forces
of conservatism in HE are powerful and deeply embedded. That
has indeed been a strength in previous times of externally imposed
turmoil, whether the funding cuts of the late 1980s or the expansion
of provision in the 1960s and 1990s. The psyche of academe holds
that threats of Armageddon come and go, while the fundamentals
12.
endure. In consequence there are many
universities that have yet to respond in any
significant way to the changed economics and
market imperatives. They include a number of
excellent and reputable institutions that have
historically done well in the old, funded world.
They risk becoming the zombies of the new
order.
The term is borrowed from analyses12 of
the impacts of recession on commercial
organisations. The global financial crisis has
left many corporations mired in a half-life of
just about covering their operating and capital
costs (usually through radical cost cutting)
but being unable to generate or secure the
resources to bootstrap their way to growth.
Unlike previous recessions, the new dynamics
of world markets mean they cannot rely on a
general economic recovery to buoy them up
again. It is only the consequential losses faced
by their investors and creditors that save them
from insolvency.
The university counterparts to these corporate
zombies display the same traits. They cannot
look to recovered growth in their traditional
markets or benign government interventions
to revive their fortunes. Instead they face
successive rounds of cost cutting and
rationalisation as they shrink to fit reducing
revenues, competitive decline as others offer
more attractive and cheaper options, and
a never-ending cycle of redundancies and
blame. And, just as corporate zombies are
kept alive by the third-party losses that would
accompany foreclosure, higher education
zombies will struggle on by dint of the
political, economic and reputational costs
(for the wider system) of the alternatives.
See http://www.paconsulting.co.uk/our-thinking/how-are-organisations-managing-in-todays-more-unpredictable-and-volatile-world/
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OLIGARCHS, INNOVATORS and ZOMBIES
Strategies
for the new order
The strategic priorities are, not surprisingly, quite different
for each category of university, although all must build their
future prosperity from the same three platforms – global
engagement, enterprise management and strategic partnering.
The handful of British oligarchs may be envied as aspirational models
in the domestic context, but their superiority is less assured in the
international competition for the most discriminating students,
faculty, research sponsors and business clients. All of these are
able to choose between the best and most prestigious universities
in the world, many of which enjoy wealth and facilities that the UK
oligarchs struggle to match. Although Cambridge, Oxford, UCL and
Imperial attract international esteem, and are each $1 billion a year
businesses, this is less than half the annual earnings of Harvard,
MIT or UCLA (among many others), all of which also have multibillion dollar endowments to subsidise their competitive educational
provision. The challenge for the UK oligarchs is to grow as global
brands, competing on equal terms with the world’s best in the
competition for internationally mobile education, research and
knowledge services. This will entail sustained investment at scale in
their academic faculty, facilities and research capacity, leveraging
their strong asset base to attract external investors.
The new markets and services being developed by the innovative
universities are mostly addressed through arms-length subsidiaries
and joint ventures, partly for tax and charitable-status reasons and
also to circumvent the rigidities of the ‘mother ship’s’ governance
and management structures. A side-effect of this is that the
innovative developments remain peripheral to the core business and
operations of the university, which often continue largely unchanged.
The challenge for the innovative universities is to integrate their
enterprising developments into the mainstream business-as-usual
of the organisation. This may involve rethinking organisational
paradigms, possibly along the lines of diversified commercial groups,
and redesigning roles, responsibilities and relationships between
established academic governance structures and the requirements of
new business models.
Those institutions at risk of becoming zombies are caught in
a Catch-22 dilemma: deep-seated shortcomings in enterprise,
competitiveness and innovation both create their problems and
limit them from redressing them. These universities lack the internal
resources to bootstrap themselves out of the zombie spiral.
Fortunately, there is no shortage of
third parties able and keen to work with
established universities to align their
business interests for mutual benefits.
Such partners, often coming from the
private sector (which sees global HE as a
major growth opportunity), offer shared
investments and ventures across the whole
spectrum of HE services, from international
student recruitment to joint teaching
programmes to on-line course delivery to
buildings and facilities, as well as in business
support and infrastructure services. Making
a success of such collaborations requires
strategic partnering capabilities that may
not fit easily with the available skills and
structures of the university partners, but can
be acquired and developed.
Underpinning each of these strategies are
the imperatives of competent management
processes and systems to ensure costeffective deployment of resources and the
control of risks and performance. However,
while undoubtedly necessary, efficient
management systems are not sufficient to
assure future success.
Sustianable prosperity, for any kind of
institution, will as ever depend on continuous
adaptation to a constantly shifting world.
OLIGARCHS, INNOVATORS and ZOMBIES
PA Consulting Group is the leading adviser on strategy, business planning, organisational change and
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To learn more about PA’s services to higher education, please visit www.paconsulting.com/highereducation
or contact us at [email protected].
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