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Strategy Under Pressure: The Cost of Living Crisis for Universities

by John Britton | May 24, 2022 | Strategy & Transformation

It’s that time of year when universities are finalising their financial forecasts. A significant portion of the forecasting work is centred around expectations for unit growth in income and costs.

Universities are of course subject to all of the same cost pressures as those experienced by major commercial enterprises: fuel, salaries, pensions, taxation, borrowing costs, and capital investment costs.

Risk also generates costs of its own, with Brexit, coronavirus, and the conflict in Ukraine all creating volatility in terms of business costs and income streams. These three external shocks, one after the other, have been and continue to be disruptive in terms of retention and recruitment of staff. All of which affect universities’ ability to deliver their services. There is a feedback cycle where stakeholder dissatisfaction leads to reduced income in future years. At its severest, this poses the risk of the ‘spiral of death’, when an organisation repeatedly loses custom without reducing fixed costs quickly enough.

Some of these pressures compound each other. The union for academic and senior administrative staff, UCU, has highlighted during the latest pay and pension negotiations that its members have received ‘12 years of below-inflation pay offers’, which means ‘pay has fallen 20% in real terms since 2009’. This has made recruitment and retention more difficult, particularly in areas of professional services where individual skills are highly transferable (e.g. IT, business intelligence, risk management and compliance) and there is external growth in the job market. Similarly, growth in student numbers in some subject areas (e.g. business and computer science) has quickly outpaced the ability of universities to recruit experienced staff. The symptoms of this – worsened staff and student satisfaction – create additional challenges for subsequent years.

‘Growing yourself out of trouble’ is one option available to many universities, with the underpinning idea that increased economies of scale are achieved when the margins from greater numbers of individual students add up. This is challenging, however.

The largest pool of students is UK undergraduates, and TRAC (Transparent Approach to Costing) teaching data shows that most subject areas cost more to deliver than the £9,250 fee, even when OfS teaching funding is added to that. The TRAC subject cost figures are spot figures that do not reflect the ‘cost curves’ that underpin delivery in the real world, but are nevertheless a useful rule of thumb.

There is a more general, and profound point: inflation has significantly eroded the value of £9,250 fees. The Institute for Fiscal Studies notes that ‘2022–23 will be the fifth year that maximum tuition fees have been frozen in cash terms at £9,250; they have largely been unchanged in cash terms since 2012. […] This already amounts to a 15% real-terms cut in the level of tuition fees over the past decade’. Increased recruitment of UK undergraduate students could actually worsen a university’s financial situation as inflation drives costs and erodes the fee.

Increased recruitment of international students (with the associated margins) is attractive, but this is a mature market with the prospect of relatively few unpicked opportunities, and increased reliance on this income stream brings with it the risk associated with increased geopolitical volatility.

Recent figures from the ONS demonstrate a considerable investment in the research base in England in the years leading up to 2020 that takes it above the level of 2009 investment by a further 10% in real terms, giving a strong platform for investment following the release of the Research Assessment Exercise (RAE) results. In Scotland, similar support has been demonstrated for the sector, with the SFC’s equivalent formula-based quality-related (QR) funding 25% higher in real terms in 2020 than in 2009. The picture in Wales and Northern Ireland is more concerning, with the equivalent funding streams remaining below 2009 levels.

University councils will face some challenging scenarios when reviewing the financial forecasts this summer. Universities are historically resilient, with some institutions in the sector having been an important part of life on these Isles for 800 years. There will be unexpected benefits, such as some universities who have borrowed extensively seeing the value of those borrowings (and the repayments if they have been fixed) eroded by inflation, while the institution enjoys the profit and loss account benefits of the investments in buildings and capital equipment that the loans or bonds have financed. The key role of universities in helping society to get through the coronavirus pandemic (vaccines, testing centres and civic infrastructure) has been recognised, and even though there is a lot of noise in the media about ‘culture wars’, the public, government and the civil service have received a profound ‘worked example’ of the value of the sector, which will help make the case for future support.

John Britton is a Consulting Fellow at Halpin, the home of experts in higher education strategy, governance and fundraising.