The spirit of enterprise

As competition intensifies, universities that focus on third-stream income and that revamp the campus experience will be in the strongest position to thrive in the future, believes David Barnes

April 3, 2008

The results of the Grant Thornton-Times Higher Education review of the financial health of higher education institutions in the UK confirms much of what we already know: that there are very rich universities and comparatively poor universities, that there has been a period of real increase in income, largely through the introduction of tuition fees, and that the sector as a whole is just about managing to balance its budget.

However, underneath this there is a darker message and one that needs to be considered carefully. An increasing polarisation between institutions is starting to take place, which is now being reflected within the financial results, and this polarisation is only going to accelerate in the next few years.

Currently, some 23 institutions receive 75 per cent of Higher Education Funding Council for England research funds and 18 receive three quarters of research council funds. We have seen the heavy investment that some institutions have made to secure their funding from the research assessment exercise, and we expect that this will result in the concentration being made even more acute.

For those that miss out on the current round, the consequences could be costly. Not only will there be a potential loss of research income, but institutions may well experience a realignment of staffing, with academics seeking an active research environment going elsewhere. Those institutions that "staffed up" ahead of the RAE will also be forced to make changes to their staffing regimes if they are unsuccessful in getting the required ratings.

With some notable exceptions, third-stream funding is still not well established in the sector. This is due predominantly to the fact that the primary purpose of universities is still seen to be the provision of academic research and teaching, and not to be a commercial organisation. However, if the lessons from those that are successful can be spread more widely, then the opportunity to generate alternative income while not jeopardising the basic ethos of the institution could still be achieved.

Overseas students have also provided a valuable source of income to institutions in the past few years. However, our concern is whether the risks attached to this income stream have been properly evaluated and whether fees from international students are being considered core income. The burgeoning overseas student market might not continue forever, and it is important that institutions ensure that they can manage any resultant reduction in income without catastrophic consequences should it arise. The "smart" institution is seeking to spread its risks by recruiting from a number of overseas countries.

Institutions need to consider future demographic trends carefully. A predicted decline in the 18-to-30 age range in the next decade is likely to be matched by widening participation. However, this potentially leads to quality issues, so ensuring that standards are consistently achieved will be a challenge in future.

Students are also starting to regard themselves as customers with rights, and they will expect institutions to meet obligations - real or perceived - to them. In part, this is a result of the introduction of tuition fees, which have made students paying customers, but it is also due to the increasing competition that is occurring between institutions.

That institutions are looking to continue to improve the student experience is evidenced by the increasing capital refurbishment programmes in the sector. The increasing debt being taken on by institutions is, in our view, a positive situation, provided that it is part of a planned strategy. Institutions have entered many excellent funding deals that should enable them to improve their fee-generating potential significantly in future.

Nevertheless, this leads back to the real issue - that the sector, while maintaining its collaborative stance, has now become more competitive than ever. In our view this will become more obvious in the future, with the richer institutions getting richer and the poorer establishments having nowhere to go.

We believe that institutions must recognise that they can learn lessons from commercial organisations. They need to ensure that they are properly considering their market strategy and what their competitive position is. And, most basically, they need to understand how to market themselves effectively to students.

Those that are struggling to meet the new pay awards will be faced with the risk of declining student numbers and limited security on their future income streams. Institutions in this predicament need to take steps now to ensure that they will be in a position to survive and hopefully to thrive in the future.

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