The future of revenue diversification in higher education | Part 1 — why are we investing in this space?

Although much has been said about the large and growing financial problems facing the higher education (HE) sector, there is relatively little out there on what can be done to address these problems. At Emerge Education and Jisc, we believe that technology-enabled revenue diversification presents the biggest opportunity for universities to address these financial challenges and drive significant growth.

This article is the first of a two-part series on the future of revenue diversification in HE - developed in collaboration with 30+ university senior leaders, startup founders and sector experts.

At the end of this article, you will have:

• Learned about the underlying root causes behind the financial challenges faced by universities
• Gained insight into the growing importance of revenue diversification as a strategy for growth
• Developed a greater understanding of the six emerging models that are set to shape the future of revenue diversification in HE
• Learned first-hand insights from universities and third-party providers that are leading the way
• Gained awareness of how to access further insights and support as a founder building a business in this space

In recent years, financial sustainability has become the single biggest existential threat faced by universities

As identified through our in-depth research with 50+ university senior leaders, financial sustainability is the biggest existential threat facing the higher education (HE) sector today.

In the UK, this threat has grown rapidly in recent years as the number of universities in deficit has more than quadrupled from 25 in 2015/16 to 114 in 2018/19. This challenge is even more pronounced in the US as c. 1,200 campuses have shut down over the same period, resulting in the displacement of c. 500,000 students.

This threat is expected to accelerate as a result of the Covid-19 crisis

In the UK, the IFS predicts long-run losses between ￡3-￡19bn due to Covid-19, with a ‘central scenario’ prediction of ￡11bn. This is larger than five years of surplus at the pre-pandemic level. The majority of these losses are expected to stem from a decline in international student recruitment and increases in the deficits of university-sponsored pension schemes.

In the ‘central scenario’ modeled by the IFS, 13 universities educating more than 100,000 students are expected to become insolvent in the absence of a government bailout or debt restructuring. In the US, McKinsey predicts that losses resulting from the pandemic could ‘add up to $19bn’ from a decline in undergraduate (UG) enrolment alone.

There are four fundamental root causes behind the trend of declining financial sustainability

Through our engagement with university leaders, sector experts and startup founders, we’ve identified the following root causes behind the declining financial sustainability of universities in recent years:

• Fundamental changes to university funding — in both the UK and the US, there has been a seismic shift in university funding from government sources to student tuition fees. The size of this change in the UK can be seen in the graph below. Ultimately, these changes have significantly altered the market dynamics of HE, and have created a reliance for universities on tuition fee income. In the US, this has been particularly problematic as college enrolments have declined for 8 consecutive years.

• Policy constraints — alongside the decline in government funding, the regulatory environment for universities has consistently toughened over time in the UK. Policy changes have often made it more difficult for universities to adapt and grow, including the recent re-introduction of student number controls, and removal of the home fee status for EU students in the UK.

“In general terms, I would suggest we are in an over-regulated, disproportionately interventionist and not at all risk-based regulatory environment.” — Paul Greatrix, Registrar at the University of Nottingham

• Slow adaptation to market needs — many universities have been slow to adapt in line with the rapidly evolving needs of students and employers. For example, it takes more than 18 months on average to develop a new UG course, and the typical refresh cycle for a course is close to 5 years in the UK. This has led to the rise of ‘faster and cheaper’ alternatives from employers (e.g. Google) and new providers (e.g. Lambda School) who have been able to create and update courses at a much faster rate.
• Limited commercial ways of thinking — despite the growing need to serve students as consumers, the commercial capabilities of universities can at times be limited. This can lead to significant challenges around commercial decision-making and profitability. For example, almost all undergraduate courses are marketed at the same price to the UK student population, despite extreme variances in the relative profitability of delivering these courses. Based on the current model for course delivery at UK universities, the average cost of provision exceeds the UK tuition fee for most undergraduate courses.

Universities have three key strategic options available to address the financial sustainability challenge

Based on the current financial position and capabilities of a university, senior leaders have three high-level strategic options available to address their financial sustainability challenges:

1. Scale existing activities — approximately 80% of university income is generated from ‘traditional revenue streams’, defined here as on-campus degrees and research. As research is typically a subsidised activity for UK universities, growth in enrolment and retention rates for on-campus degrees will be required to increase net income through these ‘traditional revenue streams’. Given the lack of profitability for most UK undergraduates courses as highlighted above, the potential impact of this revenue stream will be highly dependent on international student recruitment in an increasingly competitive market.
2. Diversify revenue streams — outside of on-campus degrees and research, universities generate revenue from a range of alternative sources including: online education provision, commercialisation of physical assets and investment returns. For example, before the pandemic, online learning constituted 8% of all UK HE provision, and an estimated ￡2bn was generated each year from letting student accommodation.
3. Drive operating efficiencies — reducing costs through operating efficiencies can also help to improve financial health. The most common option here is to target staff costs, as they represent more than 50% of the cost base at both UK and US universities, with notable increases over the past 5 years.

Revenue diversification (RD) offers the greatest opportunity for universities to grow income

Out of the three high-level strategic options identified above, RD presents the greatest opportunity for growth. This is due to the flatlining of traditional revenue streams from ‘existing activities’, as the number of domestic UG students has seen little to no growth in the UK in recent years, and has even declined to a record low in the US. Prior to the pandemic, international enrolment for on-campus degrees was under threat from rapidly rising global competition. These tuition fees are now facing unprecedented risks, and the threat of global competition is expected to increase in the coming years.

The third option for universities is to reduce costs by driving operating efficiencies. Although this strategy has grown in importance as universities come under greater budget constraints, this option presents potential risks for the delivery of a high-quality education experience, and also offers no potential for growth. As a result, revenue diversification is the only strategic option that presents a significant opportunity for increasing university income.

The future of revenue diversification will be characterised by a shift from the commercialisation of physical assets to new online offerings

For most universities, RD efforts have typically been focused on the commercialisation of physical assets such as student accommodation, conferences and catering operations. The use of pathway providers to increase international student enrolment and retention has also been a popular option for many US and UK universities. In the context of growth opportunities, these revenue streams are limited, particularly following the onset of the pandemic.

On the other hand, technology-enabled RD presents significant opportunities for growth, as demonstrated in the US where enrolment in online courses has more than quadrupled in the last 15 years. At an institution level, the realisation of this growth potential can be seen in the case of Southern New Hampshire University (SNHU), where online enrolments have grown from 3,000 in 2003, to a staggering 132,000 in 2019.

As a result of these trends, larger numbers of universities are viewing new and innovative technology-enabled course offerings as a key driver for growth. At the same time, it’s important to recognise that most institutions will need to pursue a combination of two or all three strategic options to effectively address their challenges around financial sustainability.

There are six key strategies that can be deployed to significantly grow revenue without relying on traditional on-campus tuition fees

The emerging models of technology-enabled RD are:

1. Online UG and PG degrees — this includes the transitioning of existing degrees online, and the creation of brand new online degree offerings. Holon IQ predicts that the online degree market will more than double from $36bn in 2019 to $74bn in 2025, with significant growth expected in future years as this figure only represents 3% of the projected HE spend in 2025.
2. Immersive workforce-ready professional programmes — this model constitutes short and targeted bootcamps focused on improving student employability in specific disciplines. The number of students graduating from these bootcamps in the US has grown 11x from 2,178 in 2013 to 23,043 in 2019. In 2019, the University of Birmingham and the University of Manchester were the first HE providers to launch bootcamps in the UK.
3. Alternative digital credentials — this model refers to all online courses outside of degree programmes, including credit-bearing microcredentials that can be ‘stacked’ to attain a university degree. This model has seen rapid growth in demand, with one in four US universities now offering digital skills badges, and 73% stating that alternative credentials are “strategically important to their future” according to Pearson and UPCEA.
4. Education brokering for employers — this refers to the establishment of employer partnerships to deliver higher education for current employees. Although the number of adult learners in HE has continued to fall in the UK, there is a growing opportunity for universities to address the ever-increasing upskilling and reskilling needs of employers. The realisation of this opportunity can be seen in the US, where 35% of the university population is aged over 24, and this segment is expected to grow much faster than the number of students aged 18–24.
5. Commercialising ‘education IP’ for other institutions — this model entails the licensing of one university’s educational content and/or pedagogy to another university or education provider. As global enrolment in HE is expected to double and reach 400mn by 2030, this model will become increasingly important as it creates an opportunity for the >90% of students that attend ‘unranked’ institutions to access content from the world’s leading universities.
6. Investing in high-risk strategic opportunities — in line with regulatory requirements, not-for-profit universities in the US and the UK have the opportunity to make strategic investments that are aligned with their charitable purpose; the advancement of education. A popular example of this is investment in spinouts, which has seen a 13x increase between 2013 and 2018 according to Global University Venturing.

The growth potential offered by these new revenue streams will vary depending on the current capabilities of each university

Although each of these revenue diversification strategies present significant opportunities for growth, the extent of this potential will vary based on the specific capabilities of each university:

• Brand strength and selectivity — the strength of a university’s brand can be measured through league table rankings, which in turn correlates closely with selectivity. In an increasingly marketised and digitised environment, the importance of brand has continued to increase as the most ‘prestigious’ universities can dominate market share without being limited by physical constraints. This is particularly applicable for online degrees and alternative digital credentials where students prioritise university and faculty reputation when picking a university.
• Financial reserves — this reflects the current endowments of a university and it’s ongoing profitability. This capability is important as many forms of revenue diversification require up-front investments from the university. For example, investments in high-risk strategic opportunities will require a university to have strong financial health including significant unrestricted reserves.
• Geographic location — alignment with student demand and employer needs are often key determinants for the success of a university course. Geography plays a key role here, as most students complete (on-campus and online) courses at universities within commuting distance, and the majority of graduates go on to take up employment within the local region of their university. Therefore, student demand for all courses including online programmes will typically be higher for universities located in more densely populated regions.
• Agility and appetite for innovation — in a rapidly changing HE landscape, the most agile universities have seen significant growth. Revenue diversification requires strong appetite for innovation from leadership, and an agile culture across the institution. This varies greatly both within and across different universities, with ‘self-sustainable’ institutions and departments (e.g. self-funded continuing education departments) often leading the way. By definition, agility is a pre-requisite to success in revenue diversification, as each of the six strategies require new capabilities and ways of working.

Based on existing capabilities, the HE sector can be segmented into separate high-level categories, with different optimal RD strategies for each category

Although there are significant differences between the HE sectors in the UK and the US, and vast diversity within each sector, there are select traits that can be found in common between different groups of universities. Based on these common traits, three high-level categories have been defined below, along with the optimal RD strategies for each category.

A) Top tier universities with large endowments and limited agility — the top-ranked universities typically have the largest endowments, and the lowest need and appetite to adapt. These institutions are well-positioned to expand their online course offerings and attract large numbers of students by leveraging the strength of their brand. For example, the London School of Economics (LSE) deployed this strategy by partnering with 2U, the online programme manager (OPM), to roll out a suite of 13 short courses in 2019. The success of these courses then led to the extension of this partnership to launch 7 fully online undergraduate degrees in 2020.

B) Mid-tier universities with large local populations and strong regional employer demand — many of the universities that are found between 100–500 in global rankings are located in cities with relatively large populations and strong employer demand for specific skills. The local geography can be turned into a strength for these universities by delivering online courses and professional programmes that are directly aligned to the needs of the local economy. For example, the University of Miami has established a successful partnership with HackerU, the digital skills bootcamp provider, to deliver in-demand and up-to-date courses on cyber security and digital marketing.

“A partnership with an educational provider like HackerU allows us to keep our students and their objectives at the forefront. We develop competitive programs that fill employers’ needs, close the skills gap, and prioritise the quality of learning experiences.” — Desiree Young, Executive Director at the University of Miami

C) Mid-tier universities with immense agility and appetite for innovation — for the remaining universities that are not placed in the top 100 rankings, and are located in regions with relatively lower populations and employer demand, agility and appetite for innovation is critical to the success of their revenue diversification strategies. This can be seen in the case of Coventry University that has risen >200 places in the QS global rankings over the past 5 years, while also growing tuition fees by 33% — a figure that is only second to University College London (UCL) in the UK. This continued growth has been powered by a range of innovative strategies that include: expanding the number of campuses, investing in digital infrastructure such as Aula to enhance the student experience at scale, and partnering with third parties such as FutureLearn to expand their online course offerings.

The above categories are not exhaustive and there are large numbers of universities that fall into other categories, such as lower-ranked universities, and institutions with neither a geographical advantage nor a strong appetite for innovation. For the universities in these categories, the impact of the identified RD strategies is likely to be more limited.

Startups and technology providers will play a key role in helping universities to diversify their revenue streams

The graph below from Holon IQ highlights the rapidly growing role of third party partnerships in revenue diversification for universities. Over the past two decades, universities have formed 924 public-private partnerships (PPPs) to deliver ‘new and innovative academic programmes’ such as online degrees and bootcamps. This trend is expected to substantially accelerate as a result of Covid-19, with a current estimate that the addressable market for third party providers will more than double from $7bn to $15bn by 2025.

The rise of these partnerships have been driven by a fundamental need for universities to access new capabilities beyond what exists within their organisation:

• For example, these third party providers have delivered significant value in online student acquisition, particularly for adult learners and new demographics that typically sit outside of the traditional focus of a university.
• Third party providers have also played a significant role in designing and delivering new industry-relevant content. For example, companies such as FourthRev add value by aggregating up-to-date employer content, and directly embedding this within new and existing university programmes.
• Many providers, particularly bootcamps, play an active role in providing students with direct access to industry professionals and employers.
• Finally, the technology provided by these third parties enables universities to deliver a seamless digital student experience without the need to make significant up-front investments in their own platforms.

At Emerge, we refer to this overarching trend as the third wave of education innovation, with larger numbers of third party providers taking full ownership of the education value chain from student acquisition and course design, through to course delivery and student placement.

The role, size and prevalence of third party providers varies greatly across different types of revenue diversification

There is notable variance in the maturity of the six revenue diversification categories listed below, with large numbers of third party providers operating across online degrees and alternative digital credentials, and fewer companies offering solutions across the remaining categories. We have identified some examples of the leading and emerging players in revenue diversification in the market map below.

At Emerge, we are on the look-out for the companies (existing and new) that will shape revenue diversification in HE over the coming decade.

Today, revenue streams outside of on-campus degrees and research make up <20% of the income generated in HE. Based on the vast untapped potential for growth, and the critical need for universities to innovate their business model, we believe that the identified models of revenue diversification will see a significant expansion over the coming decade. As highlighted in the examples above, third party providers are set to play a fundamental role in this growth.

In Part II of this series, we will present a guide to the RD market for startups, based on insights gleaned from further conversations with leading experts, universities and employers. The purpose of this guide will be to provide detailed insights into the six RD strategies defined above, and outline practical advice that can be used by founders to build a successful business in this space.

If you are a founder building a business in this space, send us your deck here.

Thanks to all the individuals who participated in the first phase of our research.

• Ahmed Haque, Founder and CEO at Didactic Labs
• Bennett Dwosh, Director of Strategy at ASU Enterprise Partners
• Burck Smith, CEO at StraighterLine
• Dan Sommer, Managing Partner and Co-Founder at 10XImpact
• Dan Vigdor, Executive Chairman at HackerU
• Desiree Young, Executive Director at the University of Miami
• Diane Morgan, Director of Talent at Zinc
• Duncan Dunlop, Director of Enterprise and Government at FutureLearn
• Gerald Jaideep, CEO at Medvarsity
• George Straschnov, Managing Director at Bisk Ventures
• Jack Hylands, Co-Founder at FourthRev
• Keith Zimmerman, COO at the University of Bath
• Paul Greatrix, Registrar at the University of Nottingham
• Rob Cohen, Senior Advisor at 2U
• Shamsudeen Mustafa, Co-Founder and Co-CEO at Correlation One
• Stephane Muller, Academic Director at the University of California, Irvine
• Sue Attewell, Head of Edtech at Jisc