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

2. 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.

3. 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

4. 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?

5. 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

6. Relative growth in HE activity and funding (UK)

7. 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

8. 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

9. 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

10. 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

11. 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.

12. 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?

13. 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

14. 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?

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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?

22. 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.

23. 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 (
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