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Redefining the business model

"Universities will have to re-examine every aspect of their operations - and the assumptions that underlie them."

mike boxall , higher education consulting, Pa consulting group

Mike Boxall
Policy Review Magazine
6 September 2010

The business of higher education over the past 20 years – if not longer – has been a Micawberesque balancing act of matching getting to spending.  However, unlike the Micawbers, the threshold for economic happiness has been rising every year, requiring universities to “get” more and more – predominantly through public grants – to sustain inexorably increasing levels of spending. 

Universities’ costs have grown about 10 per cent every year, and public funding has risen in line with their increased demands. Outputs, productivity and external impacts have undoubtedly also risen, but nothing like as much.  This cost-driven spiral has been justified by the largely unquestioned equation of costs with excellence. 

Excellence in HE has been defined on their own terms by the academic community, and measured largely in terms of spending on input resources and the activities that mobilise them.  Most of the criteria for university ranking tables use levels of spending and activities as proxies for quality and excellence: student-staff ratios, spending per student, contact hours, research activity, quality processes, etc.  There is, accordingly, a close correlation between universities’ league table placings and their levels of current and accumulated spending.

So, faced with the prospects of cuts in the public funding that has sustained this uneconomic business model, the debate across and within institutions has focused on the question:  “how can we reconcile the costs of excellence with reduced (public) funding levels?”

This is an unhelpful way of thinking about the challenge facing universities, creating a zero-sum view of the HE business model, wherein the only degrees of freedom for responding to reduced input funding come from cost-cutting and rationalisation – doing less with less.  This leads to the classic Red Queen phenomenon, of institutions running faster and faster simply to stay in the same place.  The irony is, of course, that once the fat has been trimmed – and there is certainly scope for that – cost-cutting strategies create their own downward spiral of reduced capacity and limited responsiveness.

In a recent survey of university vice-chancellors, nearly three-quarters thought it probable or highly likely that some institutions would fail or disappear in the next few years because they had not adapted to the changed funding environment (although not one thought that their own institution was at risk).

An even more compelling reason for rethinking the sustainability question is that the basic economics of higher education are changing, indeed already have changed.  The old regime of supply-side, entitlement funding is being replaced by a world in which universities must earn their living through the value that they generate for a whole range of client groups, including the Government, which is firmly committed to a contestable “something for something” return on its spending in this and every other area.

This new economics brings with it new conditions for the success of universities, and requires fresh thinking about the business of HE in the wider economy of learning and knowledge.  At the heart of this change must be recognition that the judgments that matter about quality and excellence will be made, not by academics but from the “outside-in” by a whole range of paying clients for HE services.  And that all of these client groups, not least the Government, have an increasing range of choices over the source and delivery of those services. Quality, in the new world order, is increasingly a matter of fitness for purpose rather than satisfaction of an producer-defined academic gold standard.  Excellence is about the value and benefits of the learning experiences and other offers from universities to their paying client groups. It is about enabling others to excel in a global knowledge society.

All of this implies a quite different image of universities within the growing economy of learning and knowledge, and a different mindset for those running them.  It can be summarised by a slightly wordier reframing the “sustainability question”: “How can we best deploy our unique and special assets to enable our client groups to excel, and thereby to generate the earnings we need to sustain our values?”

This formulation opens all sorts of exciting discussions about the organisation and operating models of universities, their working cultures and their relationships with other institutions, private providers, Government and business, and, of course, with students.  The need for radical changes in these areas is widely recognised among university leaders: in the survey mentioned earlier, more than 75 per cent expected that new business models for HE operations and delivery would be probable or a likely outcome of the current funding crisis. 

A rather smaller proportion are already starting to drive through changes in these areas, although there are clearly concerns about the capacity or will of university staff to adapt to a changed world.  Only 28 per cent of vice-chancellors expressed confidence in their ability to effect necessary changes across their institutions, while more than 60 per cent cited inability to move or change intransigent staff among their greatest internal constraints.

The challenge inherent in the reformulated “sustainability question” is to redefine the university business model, from a cost-driven spending machine to a mission-driven social enterprise.  Universities must re-examine and be prepared to re-invent every aspect of their operations, and of the assumptions and shibboleths that underlie them. They must learn from and sometimes partner with the private players that are offering real alternatives in the markets for advanced learning and knowledge, while also remaining distinctive from them.  It will for certain be a difficult and painful process, but less difficult and less painful than clinging to the sinking ship of entitlement funding for self-generating costs.

Mike Boxall is an expert in higher education at PA Consulting Group

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