UK: Making The Grade 2011 - A Study Of The Top 10 Issues Facing Higher Education Institutions

Last Updated: 19 August 2011
Article by Deloitte Government & Public Sector Group

Most Read Contributor in UK, August 2017

"Higher education funding sources, including government grants and international student fees, are shrinking in the UK. Rising tuition fees go hand in hand with increasing student demands and the as yet unforeseen impacts of higher education moving towards functioning as a market economy. At the same time, companies are demanding graduates with different skills in order to compete effectively on the global stage. To be successful in this new environment, higher education institutions will have to radically transform the way they do business. This publication highlights key issues facing higher education, which our research shows transcend national borders. Our aim is to work together as a global education practice to help create shared solutions and bring new insights to our clients."

Julie Mercer, Associate Partner and Head of Education, Deloitte United Kingdom

"For higher education institutions, success involves a large range of activities – from improving student outcomes and maintaining educational excellence to attracting the best faculty and planning for the future. Deteriorating financial conditions put all of these activities at risk."

Kathy Karich, Principal and U.S. Higher Education Lead, Deloitte United States

"Higher education institutions are in the midst of a perfect storm. Government funding is declining, market conditions have reduced the value of endowments, private backing is on the wane and costs are going up. Yet, these combined challenges create a unique opportunity for transformation. Educational institutions willing to think laterally can position themselves to outperform into the future."

Louise Upton, Principal and Canadian Higher Education Lead, Deloitte Canada

A transformation in education

In today's uncertain global economy, the continuing acknowledgment that education is critical to long-term economic prosperity seems to be the one constant. According to the Organization of Economic Co-operation and Development (OECD), "investments in education pay large and rising dividends for individuals, but also for economies," with "educational attainment linked to long-term social outcomes such as better health, political understanding and interpersonal trust."1 This holds particularly true for higher or tertiary education. Indeed, "the net public return is almost three times the cost of investing in tertiary education."2

All who have meditated on the art of governing mankind have been convinced that the fate of empires depends on the education of youth.

Aristotle

Despite the obvious economic benefits, however, spending on higher education is coming under increasing pressure these days. As nations around the world work to recover from the global financial crisis, they are tightening their budgets, leaving fewer funds available to the educational sector. At the same time, market weakness has reduced the value of many of the endowments educational institutions rely on. Economic hardship is also affecting enrolment levels at many institutions, as students opt for less costly educational programs or opt out altogether.

To make matters worse, educational institutions are now finding that they must meet a host of costly demands just to stay competitive. Students are expecting user-friendly, self-service administrative options as well as access to the latest technologies. Deferred maintenance is catching up with campuses with aging infrastructure badly in need of upgrades. The costs of attracting and retaining high-calibre faculty are increasing as staff retires in increasing numbers. And colleges and universities are under ever-more scrutiny and compelled to invest in systems that provide the highest levels of transparency and accountability.

Though institutions of higher education vary in terms of structure and funding from country to country, nearly all are facing these competitive pressures as they confront shrinking resources and increased demands. Clearly, higher education can no longer maintain the status quo. To achieve their mandates and serve their constituencies, they must face up to the unique challenges that the 21st century now presents. This report, produced by Deloitte Canada in consultation with Deloitte education practitioners from around the world, identifies the top 10 issues that will prove most pressing in the coming year for institutions of higher education and most in need of their attention. The report focuses on public universities and colleges and private non-profit institutions as well as looks at some of the issues facing private and market-funded institutions.

But identifying challenges is only the first step in what will need to be a radical transformation in the way tertiary institutions do business. Not only will they need to overthrow the status quo – no small task in many institutions of higher learning – but also aggressively execute on new approaches and seek out best practices from around the world and perhaps from outside the academic sphere itself. This report provides some essential strategies that institutions should consider as they seek to address their challenges as well as some fresh thinking on key institutional drivers. Drawn from the professional experience of Deloitte practitioners from both inside and outside the industry, these steps may not only help colleges and universities survive current economic hardships, but also reinvent themselves to meet the educational needs of the future.

1. Over budget and underfunded

As funding declines, cost management is key

What happens when access to funds drops at the same time costs rise? This is precisely the quandary facing higher education institutions – and solutions are hard to come by.

When the global financial crisis hit, the education sector was disproportionately affected. Private schools as well as public institutions that rely on private investment, saw the value of their endowment funds fall as declining markets took their toll. This affected many private donors as well, who lost either the ability or will to invest significant sums within the industry. At the same time, regulations limiting tuition fee increases are making it harder for many institutions to establish their own pricing and restricting them from delivering on their mandates.

Most notably, however, government budget challenges are leading to reductions in higher education spending around the world. In the United States, 43 states had enacted or proposed cuts to higher education as of August 2010.3 In the United Kingdom, the amount of money going to higher education is set to decline by as much as 80% over the next four years, although tuition increases will likely soften some of that blow.4 While this will likely work to the benefit of the Russell Group (similar to the U.S. Ivy League), which can attract students at high fees, lower tier institutions will likely struggle and may need to consider strategic mergers as a result. For the past five years, government funding to Australia's higher education sector has been on the wane. The same is true in Canada, where the proportion of federal funding to the sector fell from 80% of universities' operating revenues in 1990-91 to 57% in 2007-08.5

Beyond simply cutting budget allocations, governments are also taking a more hands-on approach in the funding approval process. Rather than providing funding upon student enrolment, Canadian and Australian governments are examining linking funding to the number of students retained to graduation. The United States (at the state level) is taking a similar tack in an attempt to coax institutions into improving efficiency, reducing program duplication and fostering cross-institutional collaboration as conditions for obtaining funding.

As operating margins shrink, higher education institutions must find new ways to cut costs without sacrificing services. Some are streamlining their business processes and back-end systems in an attempt to improve operating efficiency. Others are exploring new revenue opportunities as a way to enhance profits without raising tuitions. While responses will vary for each institution, it has become eminently clear that a proactive response is necessary to offset the potential for severe financial loss.

"As funding dries up, some universities are heading into debt for the first time. This is constraining dollars for classroom delivery and research, creating tension among different departments for scarce financial resources and jeopardizing faculty pay and staff increases. As institutions figure out how to leverage their limited resources to attract the best students, researchers and staff, they will learn valuable lessons related to realized losses on their endowment investments and likely begin to increase their investment policy due diligence."

Brian McKenna, Partner, Deloitte Canada

Exploring education's budgetary woes

It is often said that when you are in the eye of a hurricane, a false sense of calm can prevail. On some level, this is how many educational institutions are functioning in the aftermath of the global financial downturn. But organizations that continue to act as though it's business as usual may end up scrambling for survival when the funding storm hits. And the inevitability of the storm can be seen in areas outside of straight-forward government cuts.

In the United States, for instance, rising loan default rates may act as harbingers of new budgetary woes to come. According to the U.S. Department of Education statistics released in September 2010, overall student loan default rates increased to 7% in fiscal 2008 compared to 6.7% in fiscal 2007. The worst marks went to market-funded colleges, which saw their default rate rise to 11.6%. This is almost twice the 6% default rate found at public institutions and almost three times higher than the 4% rate found at private institutions.6 As default rates rise, the Obama administration is doing more than tightening its lending standards. It may also deem certain schools ineligible for U.S. student aid programs – a move that could vastly limit the flow of funds to some organizations.

While Canada does not face similar default rates, educational funding is now being jeopardized on the research side. As research grant values decline and fewer grants become available, Canadian institutions need to get better at attracting research dollars. To this end, higher education institutions must do more than collaborate with industry to identify research programs capable of delivering a social benefit. They must vastly enhance their ability to track and manage research dollars.

This imperative was brought home when some of Canada's leading institutions failed the Tri-Council Review of Institutional Policies Dealing with Integrity in Research. To comply with the integrity policy framework, institutions that receive research dollars need to implement reporting mechanisms that promote integrity and ensure allegations of misconduct are properly investigated. Absent the adoption of sufficiently robust processes, research funding for some institutions could be revoked. This is creating added pressure for institutions whose administrative functions are already overburdened.

"Educational institutions have budgetary issues so much different than a business. Schools funded by student loans, for instance, had almost come to view budgets as an unlimited resource. As lending tightens and legislatures continue to limit tuition increases, organizations need to learn how to handle potentially unprecedented budget constraints."

Thomas Mann, Director, Deloitte United States

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Footnotes

1 "Investing in the Future," remarks from Angel Gurría, OECD Secretary-General, for the launch of the 2010 edition of Education at a Glance; Education at a Glance 2009: OECD Indicators, The Organization of Economic Co-operation and Development, 2009.

2 Highlights from Education at a Glance 2010, Centre for Educational Research and Innovation, OECD, 7 September 2010.

3 Center on Budget and Policy Priorities, August 4, 2010. "An Update on State Budget Cuts", by Nicholas Johnson, Phil Oliff and Erica Williams, accessed at http://www.cbpp.org/cms/?fa=view&id=1214 on November 1, 2010.

4 The Guardian, December 19, 2010. "University funding to be cut before increase in tuition fees", by Allegra Stratton, accessed at http://www.guardian.co.uk/education/2010/dec/19/university-funding-cut-tuition-fees on December 28, 2010.

5 Times Higher Education, September 11, 2010. "A false economy? Canada counts costs of downsizing decade", by Sarah Cunnane, accessed at http://www.timeshighereducation.co.uk/story.asp?storycode=413427 on November 1, 2010.

6 Bloomberg, September 13, 2010. "U.S. Student Loan Defaults Rose to 7% in 2008, Led by For-Profit Colleges", by John Lauerman as accessed at http://www.bloomberg.com/news/2010-09-13/u-s-student-loan-defaults-rose-to-7-in-2008-education-management-falls.html on November 3, 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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