Securing a sustainable future for Higher Education Jim Port J M Consulting Ditchley Park 20 May 2004

The OECD project Financial management and governance for sustainability But sustainability of what and for what? (Survival of existing institutions not necessarily an objective) Two big themes: How can governments achieve their education and social/economic goals through higher education institutions? How can institutions protect their long-term academic and financial viability? This project is about how to achieve both objectives in a sustainable way: not one at the expense of the second.

National contexts Diversity of HE systems: 40 to 4000 institutions National reports from Australia, England, Germany, Ireland, Japan, Netherlands, Sweden, USA. These show: Diversity of HE systems: 40 to 4000 institutions National, federal, unitary, binary systems State-owned to private universities. Common pressures in most countries: Broader roles of HEIs State funding declining as a % of HEIs income Core funding being replaced by contract or incentive funding Market pressures becoming more acute Activity growing faster than capital investment Accountability to a wider range of stakeholders

Autonomy of universities and relationship to the State The State in most countries appears to want: Lower cost to taxpayer per student HEIs serving a wider range of policy agendas and contract funders Greater exposure to market pressures (e.g. international student market) Generation of more non-state income Strategic planning and management by universities Efficiency and “better management” of resources Institutions managing own risk and investment But are HEIs in a position to meet these challenges?

The position in the UK Research costs exceed income Teaching broadly funded at cost – overall – but some T costs significantly more than funding Institutions in deficit if include full economic costs Capital investment backlogs: buildings, equipment etc Lot of academic staff time is “unproductive” Much infrastructure is inflexible, and poorly utilised Leadership and management an issue Few HEIs have real finance or capital asset strategies Investment needed in people and modern working methods Perverse incentives – would HEIs use additional funding for sustainability or to increase current activity? HEIs do an excellent job, but a long way from full strategic management for sustainability

Relative growth in HE activity and funding (UK)

Changing state and higher education relationship It was once the role of Governments to provide for the purposes of universities; it is now the role of universities to provide for the purposes of Governments Fundamental shift in the relationship between the state and higher education Sir Howard Newby, Jan 2004

Possible models of a university 1. A public body which is funded by the government and sets its own academic agenda within the resources available 2. A public service organisation which manages a portfolio of activity and financing to deliver what its main stakeholders will fund, and to ensure its own future

Changing university culture? Pre-business Supply-led Reactive, resist change Depends on state Cash-funded on needs basis Administered Risk averse “Business” model Market-driven Pro-active, strategic Autonomous Portfolio financing and Investing for the future Managed Manages a range of risks

What does sustainability mean? An HEI is sustainable if: It is recovering full economic costs, managing its activity and financing portfolio, and investing for the future in line with a strategic plan (It also needs to maintain its quality and academic vitality) It may not be sustainable if: It is losing on its main operations It is relying on past investment It is not managing its portfolio – e.g. it is investing in areas with no future or not in the strategy It is not adapting to changes in its environment It is not responsive to national needs

Is this achievable in a university? A business should do all these things, but they are not standard skills in a public sector body. Are they compatible with an academic culture and a public service ethos? Do they threaten academic freedom? Will they damage the public service role of institutions? Will government be willing to pay more? Will activities be damaged? Will foregoing current consumption (to invest) in fact be penalised by loss of market share? Achieving sustainability is a significant long-term culture change for many HEIs. It needs consistent support by government and planned strategic action by institutions.

How can government achieve its aims through the HE sector? How far can market forces be allowed to shape the HE sector? Does the state wish to determine the pattern of provision and to invest as required to maintain future productive capacity? How can the public interest and the values and quality of higher education be protected? How can public policy goals be delivered without undermining the integrity of higher education? How important is institutional autonomy?

Implications of autonomy Autonomous and well managed universities can be more secure and more flexible to deliver the range of services Governments want over the long term But they can also fail: Exposure to unplanned risk Vulnerable to market pressures Inadequate management, governance, or strategy And a more autonomous and market-led system may mean that: Less popular programmes will close Public service activities may cost the taxpayer more Social goals may be sacrificed Institutions may become threatened Government has less scope to intervene

Securing institutional sustainability Institutions have experienced: increasing demands; financial pressures; and growth of activity faster than the capital investment to underpin this. Many have capital investment backlogs and some are overtrading. Most still rely on public sector skills, values, systems and freedoms. As the proportion of core funding declines, they have to manage a portfolio of finance and activity in a more strategic way and to operate in more complex market situations. HEIs most involved in broadening student access may be the most financially vulnerable. How can institutions manage on a financially sustainable basis, and respond to policy objectives without damaging their traditional values?

Conditions for sustainability Strategy: having a strategic plan to guide investment and decisions (making choices, and saying NO to some activity) Cost recovery: knowing full economic costs of activities, managing portfolio of activity, and managing projects and activity to recover full costs overall (involves academics, not just finance) Funding: not generally accepting funding or prices below the costs of the activity to the institution (needs government support) Investment: investing enough to maintain productive capacity Managing risk and opportunity: having the uncommitted cash and freedom to act in a timely and flexible manner

An institutional strategy Integrates academic and financial objectives Is realistic - not a wish-list Can be financed – not a bid Is understood and owned by staff and management, including academics who drive costs and income Is informed by objective analysis – not “we can suddenly grow overseas students faster than we ever have before” Makes important connections between strategies for T, R, estates, HR etc FEW INSTITUTIONS HAVE THIS AT PRESENT

Cost management 1. Understand full economic costs of activity – (academics not just finance). TRAC is doing this. Some costs are difficult: Academic staff time Space Central costs 2. Manage costs and cost recovery. Methods to influence recovery of costs: Portfolio management (avoid low-recovery activity) Pricing (where you can) Project management deliver at lower cost – dont “over-deliver” combine with other projects – share costs deliver so get other benefits

Pricing strategies (UK) Type of work Research of high academic value and prestige (RAE benefits, IPR etc) Applied research (little addition to HE knowledge base or IPR) Consultancy (knowledge activity, but no IPR) Commercial (no academic benefit) Pricing At least all direct costs – include space etc as per TRAC (loss-leader) fEC (TRAC) fEC plus (never below) Market price informed by fEC But don’t be afraid to ask for much more – margin for subsidy and for investment Illustrate the recommended simple approach Comment on numbers using IYTA this year (99-00) Comment on hours issues, impossibility of costing overstretch (contrast physical infrastructure), but value of recording hours for internal use Comment on Mod and EU use of timesheets and differences

Investment – future needs Going forward institutions need to plan to spend 4-5% of asset value on an annual basis for renewal and replacement Evidence for this: HEFCE study – 60 year lifetime with two major refurbishments and some modest continuing spend Sector is actually spending about 2.5-3% Plus of course investment in staff, systems, technicians, travel, books etc etc How will institutions finance and prioritise this? – and how will you evidence that you have done it? Illustrate the recommended simple approach Comment on numbers using IYTA this year (99-00) Comment on hours issues, impossibility of costing overstretch (contrast physical infrastructure), but value of recording hours for internal use Comment on Mod and EU use of timesheets and differences

So what can institutions do? Understand fEC, and always budget for whole-life costs Integrate academic/finance/assets strategies (R and T&L strategies which are also business strategies) A masterplan for the estate Maximise return on existing assets Policy on staff/infrastructure balance (many staff with poor capital investment and support, or fewer much better supported) Make surpluses and invest on a consistent, planned basis Culture change and communication internally (e.g. on the low price culture, pricing opportunities, portfolio management etc) Some academics will find this threatening – at first

And what do they need? Market awareness A broader range of strategic management skills in the SMT Governance and financial management structures which support sustainability Monitoring information and processes which give advance warning of financial health Support from public funders An investing and strategic decision-taking ethos Financial headroom A culture which accepts (and rewards) these attributes The support of the state in achieving all these Is this a new model of the university?

Institutional Strategy ACADEMIC FINANCIAL current operations future operations using current infrastructure future infrastructure generating surpluses to re-invest in Managing risk and change Tests of sustainability: . integrated strategy . portfolio of activity responsive to strategy and market . full economic cost recovery – cash to reinvest . investment in infrastructure and operations for future needs.

References On The Edge – OECD/IMHE report on the project on financial management and governance 2004 – from OECD or HEFCE/JMC Financial Management & governance in HEIs – (England report to OECD study 2004– HEFCE website) Transparency review (www.jcpsg.ac.uk) TRAC Guidance Manual Vol III Full Economic costs of Projects (HEFCE/JCPSG) – Note Sections A and B2 Financial Strategy in HEIs – HEFCE 2002/34 Teaching & Learning Infrastructure in HE - HEFCE 2002/31