3 March 2015
The global crash of 2008 sparked a proliferation of ‘zombie companies’ - the walking dead of the business world, going nowhere but kept afloat by the good will of their creditors. The disrupted market and financial environment for higher education providers has led to speculation that we might see the emergence of similar, half-alive zombie universities. Dire forecasts of impending institutional failures (for example in responses to PA’s annual survey of vice-chancellors) have persisted despite the lack of supporting examples. But, might the double whammy of unfettered competition and falling student numbers be about to prove the Jeremiahs right after all?
To test this possibility, we compared the performance of UK HE providers in terms of changes in their total student numbers over the past three years and their financial surpluses as a percentage of turnover. Although these data represent crude proxies for institutions’ market and financial strength and provide only a backward-looking snapshot view, we believe the results are nonetheless both revealing and surprising.
There is a diversity of institutional performance around the sector means of total student numbers (down 7½% overall over the period) and financial surpluses (averaging 4% of revenues). In particular it shows some ten providers recording both falling rolls (some by as much as 30%) and financial losses. About a dozen others have also lost significant student numbers but have managed to maintain small (but below average) financial surpluses.
On the positive side, there are some providers who have maintained good financial results despite falling enrolments, bearing in mind that surpluses of at least 5% are probably the minimum for financial sustainability. And a small number of institutions have managed to combine positive student growth and strong financial results.
The handful of providers recording both significant falls in student numbers and financial deficits – and therefore most at risk - are mostly, but not all, mid-sized post-‘92 institutions. They have each suffered from the sharp decline in part-time and work-based demand (including ‘other HE’ programmes such as foundation degrees and diploma courses) and also from falling commissions for teacher and NHS training. They, and a number of others also losing numbers but still just about breaking even, are often located close to larger and higher-ranked institutions that have been actively growing their undergraduate recruitment.
However, these features do not inevitably lead to zombiedom. There are more than a dozen providers, also post-‘92 institutions with vulnerable student profiles and located close to strong competitors, that have lost student numbers but have managed to sustain healthy financial results. In some of these cases, the falling rolls reflect a deliberate move by institutions to rationalise their portfolios and cut back loss-making activities. There is also some evidence that these institutions also moved early to invest the windfall receipts from £9,000 fees into cost reduction and operational improvement projects.
At the other end of the spectrum are a number of providers that have managed both to grow their student rolls and their financial surpluses, bucking sector trends. Of the twenty institutions that grew their total enrolled numbers by more than 5% over the period, ten are small specialist providers of creative arts programmes. Only three are large, pre-‘92 multidisciplinary universities. The financial performance of this ‘moderate growth’ cluster was however mixed, ranging between zero and 19% surpluses.
So, what conclusions can we drawn from this analysis?
First, predictions of zombie universities appear to be coming true. A small number of providers are struggling to escape the Zombie Zone of falling student numbers and financial losses, with a number more at risk of being drawn in to the same downward spiral. These institutions are characterised by reliance on declining student markets, proximity to strong and aggressive competitors and legacies of inefficient or inflexible operations.
Second, there is nothing inevitable or irreversible about zombiedom. An encouraging number of institutions are grappling successfully with the same challenges as the proto-zombies, and maintaining healthy financial performance despite falling overall student numbers. They show that robust management direction and tight operational controls can enable institutions to prosper even in tough market conditions.
Finally, the polarisation of winners and losers across the sector is still unfolding. Many of those institutions clustered around the sector norms of weak growth and low margins have been cushioned by the windfall effects of £9,000 fees and the last phases of managed student demand. The ending of student number controls and the erosion of fee income makes it vital for all providers to focus on the business basics: compelling student offers, proactive recruitment strategies, innovative learning experiences and above all, delivery of their promises to students.
Mike Boxall is a higher education expert at PA Consulting Group