Higher education: How (not) to cope with a deficit

A shockingly large number of universities worldwide seem to be approaching a state of financial distress. Budget deficits are spiralling, triggering staff redundancy programmes, department shutdowns and the mothballing of degree programmes, among other measures.

Universities in the United Kingdom are the most prominent example. Suppose current trends continue and no corrective action is taken. In that case, the UK Office for Students projects that 72% of UK universities will run a deficit by 2025 to 2026, amounting to £1.636 billion (US$2.24 billion) for the sector. As many as 40% will see their liquidity reserves dwindle to cover less than 30 days cash on hand.

Even Russell Group institutions are affected, as demonstrated by the case of the University of Edinburgh. It recently announced a cost-cutting programme of £140 million and 350 voluntary redundancies. Other examples include Cardiff University, Durham University, King’s College London and the universities of Sheffield and Nottingham.

A brief postmortem

But how effective are crisis management practices in creating a financially sustainable, strategy-informed future? In our view, there is much to be criticised. Resorting to these appears to be the equivalent of delaying cancer treatment until the patient has reached stage 4 and then using a broad-band, low-efficacy drug as a cure.

To address how universities can better cope with a structural deficit, we will first conduct a brief postmortem of what led universities to their current state and then offer concrete, actionable alternatives to current practices.

Contributing factors to the current state of affairs include the decline in international tuition revenues resulting from tightened immigration policies in prominent receiving countries, as well as widening gaps between cost inflation and income growth.

However, the writing has been on the wall for a long time, with under-managed cluster risks in international student recruitment and over-investment in ‘commercially unproductive’ faculty research capacities, both of which lead to a margin squeeze in times of distress.

Intra-university cross-subsidisation schemes and thin financial reserves at the university level exacerbate the pressure on professional schools to continue meeting ambitious revenue targets.

Furthermore, many universities have over-leveraged themselves with physical infrastructure investments based on overly optimistic growth projections.

Fragile universities may find restructuring to be a challenging and sometimes insurmountable task. Financial distress is often accompanied by leadership turnover and interim appointments, suggesting a lack of experience in crisis management.

That may explain the indiscriminate roll-out of countermeasures, such as reductions in staff costs through voluntary and involuntary redundancies, affecting both senior and junior staff, as well as the freezing of staff recruitment and promotions.

Cuts in discretionary budgets (for example, to fund faculty research) and temporary increases in teaching loads for faculty who stay are often part of the mix as well. This raises the question of how a significant workforce reduction (for example, 7% at Cardiff University) affects an institution’s ability to shape its future.

If one allows a crisis to shift from a strategic to a financial one, the emergency crew must be dispatched to stop the bleeding of cash flow. However, this typically involves broad strokes, prioritising speed of action over strategically informed resource planning.

This approach is operationally disruptive and can undermine the organisational fabric necessary for moving forward. It can also trigger a downward spiral of continuously haemorrhaging the personnel talent needed to build the university’s future.

A five-step plan

We propose a five-step approach as an alternative pathway to addressing short-term restructuring needs while fostering the creation of a more agile and resilient organisation.

• Diversifying revenue sources should ultimately be the top priority for schools and universities navigating financial distress. Strategically tapping into alternative income streams, such as executive education, online learning platforms and consulting, has become essential for funding restructuring programmes and future-orientated investments.

However, hasty investments in new commercial ventures should be avoided, as they are often poorly conceived and tend to result in negative financial returns. The acquisition of equity capital, for example, from engaged alumni and corporate sponsors, offers another vital channel. Alumni investors may be willing to compromise on dividend and control rights and may also agree to a finite maturity.

• Financial distress presents an opportunity for the university to deconstruct its administration, making it more project-driven, technology-focused and data-driven, ultimately freeing up financial resources.

While typically operated top-down, university structures often resemble a collection of siloed, bureaucratic clusters that generate vested interests and resistance to change. Integrating these clusters is crucial to achieving unity of purpose in the transformation journey, with cost efficiency gains to be realised along the way.

• Making educational offerings scalable and flexible is often a key step towards economic recovery. For example, it involves eliminating inefficient stand-alone operations, interlinking degree programmes and in-degree study pathways, and using digital platforms to expand serviceable markets.

Degree offerings can be unbundled into stackable learning opportunities, gradually easing learners into formally registering for the programme. Instead of using annual and fundamental programme reviews to guide curricular, pedagogical and assessment reforms, they should become a continuous improvement process to ensure currentness.

• Universities should reconsider their approach to delivering an educational service from beginning to end, especially if it also involves the deployment of efficiency-enhancing technologies.

For example, the semi-automation of candidate selection and admissions processes using AI holds great potential, especially in the context of international student recruitment. This also presents an opportunity to optimise organisational structures and processes, thereby improving coordination and eliminating bottlenecks that hinder effective and timely decision-making.

• Last, but not least, universities need to urgently professionalise their risk management processes, especially those that are already in distress. The commonly used risk registers have many flaws, including a failure to capture risk interdependencies and the use of subjective metrics to assess likelihood and impact, which necessitates complementing them with more sophisticated analytics.

More attention needs to be given to how to position the university to benefit from unanticipated developments. This brings us back to the concept of agility and resilience. Universities must be redesigned to react flexibly to shocks. Being able to respond faster and more easily than competitors will make all the difference.

In sum, universities should adopt a more flexible approach by loosening their ties to established plans and administrative principles while embracing a trial-and-error mindset. The future will show whether the monolithic, traditional and currently struggling universities will find a turnaround and regain their competitive dominance.

Wolfram Berger is a professor of economics at Brandenburg University of Technology, Germany, and an executive consultant at XOLAS Advisors GmbH, a Germany-based higher education consultancy. Ulrich Hommel is a professor of corporate finance and higher education finance at EBS University of Business and Law, and managing director of XOLAS Advisors GmbH.

This article is a commentary. Commentary articles are the opinion of the authors and do not necessarily reflect the views of University World News.