Analysis: Why the smart cash is not so clever

August 31, 2001

The Russell Group has made all the right moves so far as the research assessment exercise is concerned, but its financial tactics may not make long-term business sense. Alison Goddard reports

Research-led universities spend much more strategically than other institutions - but fail to fully benefit financially from it.

That is the finding of an analysis of university spending by Jeff Pursglove and Mike Simpson of the University of Sheffield.

The researchers found that members of the research-led Russell Group used more money from other sources - such as teaching and external income - to fund research, compared with old universities outside the group.

The report states: "Universities can use their gross margin from research and teaching for whatever purpose they wish: the gross margin from research need not be totally or exclusively spent on research activities; and the revenue from students need not be used to fund teaching."

Overall, Russell Group members spent almost three times the research grant they received from the funding council on research, compared with 2.39 times for old universities outside the Russell Group.

The analysis was based on 15 English members of the Russell Group and 15 other pre-1992 English universities.

Imperial College, London, spent 2.39 times more than its funding council research grant on research, followed by University College London (which geared its grant 2.36 times), King's College London (2.28) and the universities of Southampton (2.04) and Oxford (2.03).

At the other end of the scale, the University of Bradford was least effective at raising research cash. Its gearing was 0.99, followed by the universities of Lancaster (1.00), Salford (1.17) and Reading (1.21).

But the Russell Group fails to benefit financially from research, the analysis shows.

Dr Simpson said: "A high gross margin can be obtained by two methods: negotiating a high price from industrial sponsors; and/or targeting lucrative sponsors, such as research councils, instead of charitable sponsors, which typically provide for no gross margin whatsoever.

"However, if a university insists on a high price from industry, that sponsor may place its contract elsewhere and, likewise, the success rate of applications to research councils is less than those made to charities."

Dr Pursglove and Dr Simpson devised another indicator by looking at the ratio of profit from research grants and contracts to the salary costs of the staff employed directly to carry out the research.

The average value of this ratio across the Russell Group was 0.38 - markedly less than the average for the non-Russell Group of 0.53.

Comparing the two measures - the gearing of the funding council research grant and the profit from research grants and contracts as a proportion of direct staff costs - Dr Pursglove and Dr Simpson found that just four universities could be classified as success stories.

The universities of Birmingham, Loughborough, Nottingham and Surrey were classified as research active and profiting from it. The University of Surrey was head-and-shoulders above the rest.

Dr Simpson said: "It's very difficult to get into the area of high volume of staff and high gross margin, which is the best practice area.

"The direct staff costs are one of the things that prevent universities getting into that quadrant. Universities have had a policy of buying in research-active staff but this drives staff costs up. It basically says that the more research you do, the more it costs you."

Commenting on the research, Vikki Goddard, head of planning and development at the University of Liverpool, said: "This is an interesting contribution to a debate that is getting under way.

"We have got to get a balance between academic performance and financial performance. A meaningful discussion about performance indicators needs to get under way within the sector. There needs to be accountability but, at the moment, you can bend the statistics to say what you want them to say.

"One of the potential conclusions is that a substantial contribution to the ratios is the existence of medical schools only within the Russell Group. A third of charitable funding (which does not attract overheads) goes into medical areas, for example.

"I am not convinced that the (gearing of the research grant) is strategic. One of the key aspects in RAE terms is how much research income an institution is bringing in per academic staff member. It could be a case of people getting money in to maximise performance in the RAE."

Overall, Dr Pursglove and Dr Simpson developed six indicators that describe the financial performance of universities in terms of their mission, efficiency and strategy.

For example, all universities carry out teaching and research and, therefore, a comparison of the relative sizes of these income streams will show the relative intensity of each of these activities.

Similarly, all universities employ both academic staff and administrators to deal with the delivery of teaching, research and administrative work. A comparison of the relative costs of these categories of staff should give an indication of the type of organisation in terms of academic orientation versus bureaucracy.

To get a handle on efficiency, Dr Pursglove and Dr Simpson looked at how the gross margins from teaching and research related to academic staff costs. They also devised an indicator of operational efficiency to add a measure of administrative and ancillary efficiency to that of academic efficiency.

Dr Simpson said: "The use of these financial ratios will enable the managers of universities to operate more effectively by virtue of being better informed. We believe that these financial ratios are more useful, relevant and justifiable to all stakeholders of universities than the plethora of performance indicators found in official and non-official league tables.

"What we have tried to do is create order from chaos using information that is in the public domain. Our view was that anything that would try to make sense of a complicated situation would be useful.

"The sector as a whole is in dire financial straits. When there is a boom year, they build, and when there is a bust year, they make redundancies. This analysis shows the fragility of university finances."

Tables of financial indicators for 30 universities are in Statistics: University Performance

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