Financial sustainability is one of the key challenges for universities today, in a volatile economic climate where funding is being cut and student enrolment is falling.
Universities can ensure sustainability by adapting effective business models and maintaining a healthy degree of diversity in their funding structure. The latter includes income generated from contracts with the private sector (research contracts and education) philanthropic funding, financial activities and services. To create a more differentiated and financially sustainable institution, innovative college and university presidents are doing four things:
- Developing a clear strategy, focused on the core
- Reducing support and administrative costs
- Freeing up capital in non-core assets
- Strategically investing in innovative models
Colleges and universities frequently focus on moving up to the next level and gaining greater prestige, rather than carving out a unique strategic position. As a result, most of the strategic planning that happens in higher education is on the margins and not focused on making the hard decisions that will ultimately lead to success. The healthiest businesses, from Fortune 500 companies to start-ups to academic institutions—operate with a discipline that allows them to focus on their core business. The core is where high-performing institutions invest the most and generate the greatest returns. It is the area where they are the clearest about the value they add. It is the domain where they are the most differentiated and the place from which they derive their identity. In short, the core is the strategic anchor for the focused university.
In any industry, there are three primary paths to competitive advantage: differentiation, low cost or structural advantage. The trick in pursuing a differentiation strategy is truly understanding your unique core and then focusing resources on it. An implicit part of having a focused strategy is not only defining what you are going to invest in, but also clearly articulating what you are not going to do. If institutions try to pursue too many areas of differentiation, they’re likely to invest too broadly and thus, reduce the return on investment for capital. Given the history and culture of universities, authority is often diffused and tradition upheld, especially in the absence of any definition of value, which leads to the worst-case scenario for an institution is to be relatively expensive and completely undifferentiated. Who would pay to go to a school that is completely undistinguished on every dimension? Unfortunately, many institutions seem to be headed down that path. But by focusing on the characteristics that are truly distinctive and channeling resources to them, institutions can positively improve their performance and get on the path to long-term sustainability.
Diversification should begin with a strategic analysis of the status quo, the institutional strengths, specificities and opportunities, as well as a scan of the competitive environment. Strategic tools are available to universities to achieve financial sustainability: Universities must be able to identify the full costs of all their activities, to assess the degree to which these costs are covered by the funding source, and whether engaging with a given partner results in a profit or a loss for the institution. Pursuing an activity may be relevant if other sources can be found or if a return of investment can be foreseen in the long term. The information provided by full costing systems also further allows universities to adopt appropriate efficiency measures.
The capacity of universities to generate additional income relates to the degree of autonomy granted by the regulatory framework in which they operate. Autonomy in staffing matters, and in particular freedom in recruiting and setting salary levels of academic and administrative staff, is also positively linked to the degree of income diversification. Pre-existing additional income streams should be included in the overall evaluation. Apart from undertaking an appropriate analysis of cost effectiveness and risk of various activities, institutions need to assess the appropriateness of these activities in relation to their mission and culture.
The university leadership’s commitment to this process is of crucial importance. The leadership is best placed to project a vision and build the case for diversification activities, as well as engage the broader university community in the process. University leaders also play an important role in shaping the necessary change processes related to diversification, be it a cultural change or an organisational change.
The success of income diversification and core business streamlining strategies largely depend on the ability of the institution’s leadership to communicate effectively with the university community as well as with external stakeholders. Universities need to reinforce awareness around the range of activities they undertake and the added value they create to help potential partners valuate funding options, and reinforce the image and specific profile of an institution. Communication can also usefully be undertaken at sector level, upholding the value of higher education for the wider economy.
Interview with Dr. Geoffrey Williams of the Penang Institute on the state of higher education in Malaysia.
Hello Dr. Williams. The past years have seen a significant shakeup with the higher-education landscape in Malaysia – tell us about it?
In last year’s and this year’s budget we’ve seen significant cuts to the funding allocated to public universities in Malaysia, and this is a trend we’re predicting to continue for the future. In the Higher Education blueprint there is a chapter on creating financial sustainability in public universities, and part of this is reducing the reliance on public sector subsidies. What is surprising is that is has happened so soon and the scale of the cuts have been quite deep.
The government’s view is that the public universities have received significant funding in the past, and have succeeded in accumulating significant assets, particularly land. Research universities have also been able to secure other income sources so the government is of the view that they are able to accommodate these cuts in public funding. The general idea is to attempt to create efficiency in the public universities by being aggressive with funding cuts.
The research we’ve done showed that nearly half of the private universities in Malaysia are in some form of financial distress, and if anything the market has got worse in the last six months, due to cuts in the availability of higher education loans. That’s going to make the markets more difficult.
Could you tell us about the essential problems causing this deficit you’ve discovered?
From our study we came to the view that the deficit in most university budgeting is mostly due to bad management and financial mishandling. It’s bad management for a number of reasons: one being that many of the senior management staff come from public universities, which is how they are recruited. They are recruited for their academic experience and their status as deans, or former heads of schools, and because they have this academic status they’re recruited into private universities despite not having any experience in management in the private sector. While in public universities they could focus on spending a budget, in private universities they have to raise the budget initially, and this recruitment system is the main reason why various private universities are struggling with funding, as their chancellors or vice-chancellors don’t have revenue generating experience from the commercial sector. You need to balance the senior management of the university with people with experience in both private and public fields and good commercial leadership skills – otherwise you end up with situations of groupthink if the management are all recruited from similar backgrounds, ending in repeated failure.
With the sheer number of universities that are in distress, with a market that is getting worse, one of the options is to merge to achieve greater efficiency in administration.
In Malaysia there are a great number of higher education providers- university colleges, tertiary colleges – if you’re able to merge these institutions you can address your cost issues. In our opinion these mergers may well be inevitable, given the pressures universities are facing in the current market.
How does a university attract investors in this financial climate, and how has it affected student recruitment?
Private education, or university financing, is seen as a relatively stable safe long-term investment particularly because returns on other asset classes are poor at the moment and the financial markets are volatile. There is an appetite for investment, however the problem remains with finding the right institutions to invest in, which is a question of effective management at the university. Changes in the funding situation at public universities will have a certain effect on the market, and if universities do not adapt their management practices they will eventually be forced to by economic realities.
Public universities don’t really have an issue with recruitment – there is a significant subsidy but for the private universities it is an issue. Given the changes in funding, public university vice-chancellors are asking to raise fees but the Government is resisting, although it looks inevitable to rise in the long term. This will cause a long-term shift towards private universities who also offer a greater variety of courses.
Join Dr. Geoffrey Williams and other leading educators on 28th February – 1st March 2017 at the 2nd Annual Higher Education Asia Forum.