The higher education sector is in significant distress due to unprecedented revenue decline from international students. In this episode, KordaMentha partners Suzanne Wauchope and Henriette Rothschild discuss the current challenges facing the higher education sector and provide insights into the way forward for universities.

Transcript

Sean

Welcome to Behind Business, the podcast where KordaMentha experts discuss the most pressing issues facing business today. I'm your host, Sean Aylmer, an economist and journalist for 25 years and the voice of the fear and greed daily podcast. Today, we're talking about higher education. According to a recent joint study by KordaMentha and TMA, the economic effect of the COVID-19 pandemic on universities is huge. Behind only hospitality, tourism, retail and real estate in terms of impact. This sector is home to more than 200 institutions and employs close to 140,000 people. It's led by the group of eight universities and those big organizations have estimated revenue downturn this year of $2.2 billion.

Undoubtedly, it's a sector struggling with the impact of the Coronavirus, while academically Australian universities continue to climb global rankings, the business of running a university has fundamentally changed. Organizations need to become more efficient, source new revenue streams and think more broadly about their financial performance. To talk to us about the business of running a university now and in the future, we have KordaMentha partner Suzanne Wauchhope joining me from the Brisbane office and Henrietta Rothschild joining me from Melbourne. Welcome to Behind Business.

Let's start by getting an understanding of where universities are at the moment. Suzanne are all universities the same?

Suzanne

Sean no, I don't think they are. The universities have come into this situation from very different standpoints. Some were in very strong positions financially and in terms of sustainability and the changes they were making. Others have come into this with a slightly different scenario. And some have even acknowledged that really what's happening at the moment for them is that the pandemic is actually revealing for them what some of the underlying challenges have been over an extended period of time.

Sean

So since then, how are universities generally funded in Australia?

Suzanne

Generally there's two main income sources. One, is actually government funding, which is predominantly for the domestic students where they're supported by the Australian government funding and the federal government. The second really is then self-funded students, which actually includes international students where those students are actually full fee paying. And what we've seen is over the years, there has been a movement in the proportion of funding that has come from the government more towards funding that has come from international students. So really the international market has become to different extents for different universities, but a really important part of their funding mechanisms.

Sean

Henriette bringing you into it. What about the cost side of universities? I'd imagine that staff is a big chunk of the cost base.

Henriette

Absolutely Sean, I think it's the largest in many cases anywhere between 65, 75% of costs associated with universities as staffing costs, which is why right now there's so many headlines around the staff impact of the cost cutting that universities are having to go through.

Sean

So is inflexibility of the labor force a problem in the university sector?

Henriette

I think there's a number of challenges to quickly making any cost savings around staffing. Obviously there's a lot of sessional staff, but if those classes need to be taught, you actually need to engage staff because student outcomes is such a core part of it. There are absolutely a range of different enterprise agreements that limit flexibility. Now there's again in terms of the headlines right now, there's a huge amount of conversations going on between universities and unions to look at what flexibility can be brought in, but clearly reaching agreement that both looks after the university's longterm interests and staffing's interests is not something that's particularly easy to reach. Normally these negotiations go over many, many months. Right now, they're trying to make agreements over a matter of weeks.

Sean

Suzanne just before we move on to what's happened in the COVID-19 environment, [inaudible 00 03 57] awful lot about the benefits of face to face teaching now that there's not anywhere near as much of it going on. And I suppose into that comes the university life for a student. How beneficial is that face to face teaching, is that whole university experience, do you think for an 18, 19,20 year old?

Suzanne

I think it is inevitable as the universities have already been going down this path that more online learning is actually going to become a feature of tertiary education as it is probably with most education. I think though, the part that there needs to complement that, which is for the universities to contemplate how they deliver on that is the student experience whilst they are on campus.

Sean

Though I suppose continuing on that theme, even before COVID-19 the sector certainly faced some challenges around changes to technology and online learning. But even student demographics and how people wanted to learn, what they want to learn, what industry wanted from universities, what employers wanted from universities. And that was all going on well before February this year.

Suzanne

Absolutely. And a good case in point is I'm not sure if you've heard of about, but Melbourne Connect is actually a precinct partnership that's going on in Melbourne that I think in a very tangible way, explains exactly what's happening in the sector, which is where Melbourne Connect is actually going to be a co-location for Melbourne University with industry and government. And it provides a really purpose built student accommodation and community linkages. So that actually it all comes together to actually provide a better educational experience, a better research experience and a great sense of community and service provision, not just for students but for the businesses that interact and leverage that environment.

Sean

So Henriette since February and the pandemic hit, we've read lots about student numbers and staff agreements and international students not coming. How would you characterize the last six months for the university sector in Austria?

Henriette

I think the risk of repeating a phrase that's probably been used way too much, it's been an unprecedented and I would say catastrophic hit to revenues in many cases. I think while, as we say, many of the issues predate COVID-19, the speed at which revenues have declined and the unprecedented nature of this situation means that universities are having to adapt extraordinarily quickly to a completely different set of circumstances. As well as that without any crystal ball of exactly at what point in time borders might open up either domestic borders or international borders.

Sean

When it comes to cost savings, what are the universities currently doing? And is it enough?

Henriette

There's a lot of activity going on that's for sure. And we've read a lot about it over the last six months, but what I would say is that universities are in many cases taking the traditional approaches. So in many cases, I'd say that they're taking a bit of a bulldozer approach to cost savings. They're taking procurement costs out and then they are looking for voluntary redundancies across every single part of the university. Looking for 10%, 15% cost out. A couple of concerns there. One is that it's not specific enough. It doesn't necessarily set the university up for growth in the future if you take out the areas that are likely to grow and that very blunt tool that's being used at the moment, I think is a real risk for future sustainability. But importantly, we also don't know that it's enough because the risks that we've got right now, the revenue downturn, isn't just going to occur here in 2020.

We think that there's real ongoing risks because of course, if you miss out on one cohort of students, it's not just a one year. It's often a three or a four year proposition. So we believe that 2021 and 2022 will be at least as fraught. And you can't keep taking this voluntary redundancies 10% across the board out and get the same results. This is why we feel that universities need to cut with a scalpel instead of a bulldozer. They need to be much more precise, at times deeper in some areas, but also they need to look at non staffing costs. They need to look at their balance sheet, for example, real estate and freeing up capital and finding different approaches to this very, very fraught situation because the revenue decline is completely unprecedented.

Sean

I imagine there'd be huge competition among the universities when the international students do actually come back because everyone will be clambering for that market. With a lot of Chinese students in Australia, that's obvious, but the relationship between Beijing and Canberra is increasingly fractious. Suzanne, how do you think all that will play out? Firstly, the competition among the universities themselves, but also the impact of the diplomatic relations between the two countries on the universities?

Suzanne

I think it's difficult for anybody that's been watching the tertiary education discussion, not to notice that the proportion of international students that are from China. There has certainly been some discussion already in the press to indicate that students in China have been encouraged not to attend Australia. I think what we will see though, is that the sector will probably reshape and that's part of all of the strategies that there'll be setting at the moment. It wouldn't surprise me to see that some of them actually start to reshape for having a net reduction in the number of students and look to sustain at those levels. I also think, and this has been on the agenda for a while, is the universities will also look to diversify their source countries in terms of their students. There is a very high proportion of students that are coming, not just from China, but from Southeast Asia, from South America. And there's also quite a number of students that tend to come from the Middle East.

I also think we will probably see some more transnational, where the education is actually delivered offshore noting though that that has been a really difficult market to break into and it's not always financially successful. So I think for those universities that are already there, they will probably continue to do quite well because the access to them will actually really be quite good. The only other trend I think we will probably see more of is where students start their study overseas and they look to migrate or move as part of a student visa to another country to finish their education. So they'll start maybe locally, start with one to two years in a local university and they will look then for an articulation arrangement with an Australian US or UK university so that they can actually then still get the university degree with the badge that they're looking for.

I think you're right though. It is going to make a difference for Australia in terms of the competition between the universities, which is probably what most of the universities are taking into consideration right now, in terms of setting their longer term strategies.

Sean

Henriette, in terms of what the universities offer students. Do you think their core offerings have changed and evolved enough to attract international and local students?

Henriette

Well, I think that's the challenge right now. One of the things that attracts international students is the rankings of universities, the international rankings, and they're driven by research outcomes. In Australia traditionally, research has been costly. It's not necessarily self-funding or self sustaining and that's in fact, what a lot of international students have helped to fund.

So one of the real challenges right now is for universities to continue to find money for research that helped to boost international rankings because that will keep attracting international students from range of different geographies. And I think this is where thinking in a more holistic way and ensuring that we are thinking as an Australian education cohort, rather than spending a huge amount of time competing within Australia, that becomes a really important part of the proposition going forward.

I think another Australian advantage is the relatively lower cases of COVID and therefore the ability to market Australian universities as perhaps a safer environment for international students. So I guess that's right here. Right now. Moving to your broader question. I think that there has been a lot of work to think about international competition and the unique selling points. What we're seeing universities having to do is be very, very clear about what differentiates them and what they can compete globally on.

On as one example, Victoria University some five years or so ago, when they were facing some quite challenging financial circumstances had to be very clear that they were better at sport than many other things. And therefore doubled down on that investment because that allowed them to compete more. A lot of Australian universities are having to think more about what differentiates them rather than provide generalized offerings that don't differentiate.

Sean

So just on that point, they're really big universities, University of Melbourne, Monash, University of Queensland, university of New South Wales, University of Sydney. They're very broad and whilst they do specialize in some areas and perhaps a degree from one over the other is preferable, Australian universities do seem to be masters of all rather than specialists. Or is it a bit unfair?

Henriette

I think that's very much been the tradition. That there has been a tendency to offer similar things, but I think that's the work that's going on right now. And if anything positive comes out of COVID-19 challenges, you would hope that it is the ability of universities to think about what differentiates them and really emphasize those key areas that make them more competitive. But also to look for collaboration opportunities so that they don't try to offer everything, but they partner with other organizations that can do something better than they can. That is what we see as one of the really big opportunities right now.

Sean

Suzanne, do you think universities can change enough to do what Henriette is talking about?

Suzanne

I absolutely do. I think though it's something that we've noted previously that some of the things that are going to be required, I think have either been uncomfortable or difficult to achieve. I think there is an enormous amount of pride in every university and certainly in the way that they've been built up. And I think there's potentially some pride to be swallowed and some uncomfortable decisions to be made because we don't have to have 40 universities with the same skill sets in every single faculty area. It's not only okay for universities to place their bets. I actually think it's important that they place their bets. Some of the universities are particularly well suited. So for example, James Cook University is particularly well suited to tropical research for example and courses that are more aligned to that in terms of their location.

And I think it's a great opportunity to think about, should they actually be over-investing or disproportionately investing in those areas where they have an absolute advantage not just in Australia, but globally? And actually I think that should enrich their research options and support their global rankings going forward.

Sean

Now you've both talked about collaboration. Henrietta to you, what about back office collaboration for example? There must be areas where you think they could cut costs by actually working closer together.

Henriette

We think there's a few areas where there's really good opportunities for making some costs savings. One is exactly that. I think a lot of universities are great at teaching and learning and they're great at research, but when it comes to administration systems and so forth, productivity and efficiency is not necessarily their key strength.

By looking at collaboration for back office and less strategically important activities, we think there's a really good opportunity to free up some resources. And it means that for example, you may not have to cut quite as much in the area of research and you may not have to cut as many people costs out. But what you are able to do is get synergies with technology with backend processes and systems. But I think there's a lot more opportunity. The other one is in the area of real estate. Real estate is a big feature on the balance sheets of a lot of universities.

Sean

So you're talking about disposing of non-core property assets, sale and lease back the precinct partnership, which Suzanne mentioned earlier on that type of thing?

Henriette

Yeah. All of those things we believe are the choices that a lot of universities have probably held off on. They've tended to go straight to the save on travel costs, save on expenditure, look for voluntary redundancies. But we actually think that the opportunity right now is to do a much more significant reset for two reasons. One is because the revenue hit is so significant, but also everyone is in the same boat at the same time. So there's now potentially joint venture opportunities and merger opportunities and backend collaboration that may not have been available under normal trading circumstances.

Sean

Suzanne, what should universities be doing right now then, before the pandemic ends? I know it's a difficult time for them, but it also throws up opportunities as we've heard, what should they be doing right now?

Suzanne

Right at this very minute I think they need to, if they haven't already, acknowledge the degree of uncertainty that they're currently facing. And in that context, the range of options that they're going to need to understand, assess and need to continue to consider and implement for the future.

Sean

In a decade's time, what's university life and university going to be like? Starting with you, Henrietta.

Henriette

Sean, I think right now the phrase never waste a good crisis definitely comes to mind. This is absolutely a crisis, but it's one that allows a reset for a very different future. We're seeing in the work world, people dealing very differently with physical spaces and working from many different locations. We absolutely feel that that's a huge part of the future university, which is why we think that rethinking the real estate assets are a really important part of this. I suspect what we'll see is a far more fluid arrangement in the way that people will go about getting whether it is degrees or whatever the future qualifications will be.

Where people are picking up skills, experiences and their core educational outcomes perhaps from a range of different universities, as well as a range of different locations.

Sean

Henriette Rothschild and Suzanne Wauchope, thanks for talking to Behind Business.

That's it for the higher education edition of Behind Business. I'd like to thank Suzanne Wauchope and Henriette Rothschild for sitting on the virtual couch. We've learnt that the business of higher education is fundamentally changing. Universities have to find sustainable revenue basis. They have to diversify their income streams and not be too reliant on overseas students. Universities must become more efficient in how they deliver courses and focus on what they're good at. There's opportunity for the sector to collaborate more closely. Significantly, they need to rethink their property holdings and what sits on the balance sheet.

Undoubtedly, the business of running a university has changed forever. In the next edition of Behind Business, we'll have a look at the tourism sector in Australia. No part of the economy has been hit harder or faster. From deserted airports, to border closures and strict lockdowns. The prognosis for the sector has been dire, but there is a way through. We'll explore that next time around. Thanks for listening to KordaMentha's new podcast series Behind Business. I'm Sean .

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